The Best Divergence Trading Strategy

divergence forex

These are basic early forex signals indicating the trend reversal and filter false signals. This article is a detailed overview of convergences and divergences. When trading with divergences, never take a position at the high or the low, but at the immediate support/resistance levels. You still need the candle pattern and you still need it to come divergence forex off the right price level. If you get a trend line break, have you got a good place for your stop loss, plenty of room to move for your profit target? All those things that we talk about all the time are still massively important. So I really like reversal patterns and standard divergence, but I love continuation patterns with hidden divergence.

The price hits a lower low forming a double bottom pattern, but the MACD paints higher lows. In trading, such regular divergence signals a soon reversal of the bearish trend. The daily EUR/USD chart below gives a clear example of hidden divergence and the trend reversal that follows. This sort of chart pattern means that when the stochastic was overbought the second time, EUR/USD buyers couldn’t push any higher. So, the upside was complete even though EUR/USD couldn’t make new highs. To detect the divergence, you need to draw the line across the lows or the highs of the candlestick chart.


Get your trading evaluated and become a Forex funded account trader. You can find divergence with any oscillator indicator. However, the results vary with the currency pairs and the chosen indicator. Among all, we have shortlisted the top three oscillator indicators that can be very helpful in your trading. In Forex, hidden Forex divergence informs about the continuation of the trend. However, it is rather difficult to recognize it in a trading terminal. Hidden Forex divergence gives a clear signal to open a buy or sell position.

divergence forex

As the name suggests, ‘divergence’ is meant to indicate a change in direction. Here, in the trading market, it indicates the change in the movement of price. The price of divergence forex a security and the trader’s indicator should move in the same direction or indicate the same trend. But when they do not agree with each other, the result is divergence.

Rsi Divergence

For example, you can use 20 – period simple moving average. If you find a bullish divergence and the price is above the 20 SMA, then you enter the long position. You can place the stop-loss slightly below the recent swing low while the take profit can be placed near the next resistance level. A bearish divergence may be a signal to close your position before it falls back on itself, or at least set a stop loss to protect your gains. Meanwhile, a bullish divergence indicates a possible entry point for traders before the price begins rising.

  • It can be applied on any timeframe with default settings.
  • When looking to identify a divergence, you are watching both the price and your indicator of choice.
  • These signals are good for trend trading and for filtering false signals.
  • Divergences can clue you in that a reversal may soon occur or that a run is coming to an end.
  • The Relative Strength Index is a momentum indicator that measures the magnitude of recent price changes to analyze overbought or oversold conditions.
  • Hidden Bearish Divergence – when Stochastics are nearing overbought levels the pair falls immediately to continue the downtrend.

Sometimes price action may slow from an up or down trend into sideways momentum following a divergence. Divergence is a popular term in technical analysis that describes when the price of an asset is moving in the opposite direction of a technical indicator. In late October, both oscillators entered the oversold zone. When the price rolls back, and the first bar closes in the green zone, we exit the short and take the profit. RSI is in the balance zone; it doesn’t confirm the oversold condition.

Types Of Divergence In Forex Are:

I explained how to set up the Bollinger bands indicator and trade with it on Forex in the article. To filter false signals, you can use other trend indicators. Any additional signals delivered by trend indicators are stronger than the divergence signals. Like in the previous case, we expect a false reversal of the trend. The MACD moving average (do not confuse with the signal line!) goes below the zero level for a moment and goes back. I marked it with the blue level on the currency pair price chart. We set the stop loss like in the case with the previous trade; only it is below the price low.

Divergences Trading Signals

For example, when the Dow Industrials made new highs and when the transportation index failed to make a high it indicated that there was some discrepancy. This formed the basis of divergence theory which was soon developed into a trading system on its own. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank’s local branch, Aksioner.

Making A Winning Divergence Trade

To spot real divergence, you need to compare only the price extremes within the same trend. The primary feature is when a double top or double bottom pattern appears in the price chart. Divergence occurs when a financial security’s price displays deviation from the indicator you might see on your chart. A pip is the smallest price increment tabulated by currency markets to establish the price of a currency pair. The trend is still strong and may continue in its direction after the completion of the consolidation. At this point price is likely to fall giving bears an excite mood to open short positions.

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