Trading Divergences in Forex Summary is an overview of all covered on divergences in trading.
A divergence occurs when price movement in a trend disagrees with the underlying momentum indicator.
As price makes higher highs, the momentum indicator makes lower highs.
When you spot a difference in the movement of indicators and prices, it shows a potential change in price momentum.
This may result to a change in the direction of the trend.
Some of the commonly used momentum indicators are MACD, RSI and Stochastic
Trading Divergences in forex summary will include short notes on the types
Divergences appear in 3 different types
- Regular divergences
- Hidden divergences
- Exaggerated divergences
Regular divergences
When price action hits higher highs or lower lows when momentum oscillators are not doing the same.
For example,
When price makes a higher high and the indicator shows a lower high or price makes lower lows and momentum makes higher lows.
For an uptrend,
if price is making higher highs and the oscillator makes lower highs, this is a regular bearish divergence
Or else,
When price makes a lower low and the oscillator fails, there is a disagreement between the two. This is a regular bullish divergence.
Hidden divergences
Hidden divergences are NOT strong reversal points. They may shift the trend for some time and then the trend continues in its direction or causes no change at all.
Hidden bearish divergences
A hidden bearish divergence appears as a correction during a downtrend.
The oscillator strikes higher high and price only afford lower high or maintains its previous point.
This is a signal that the trend is still strong and may continue its direction after the completion of the consolidation.
Hidden bullish divergence
The hidden bullish divergence forms during an uptrend.
As the oscillators make lower lows, price only affords the higher lows or maintains its previous points for a consolidation.
The trend is likely to continue after a while.
The exaggerated bearish divergence
With the exaggerated bearish divergence, price forms two tops almost at the same line but the indicator’s second top is lower than the first one.
This gives an indication that the downtrend is still strong.
You can either open a new short position or continue holding your short position
Exaggerated bullish divergence
When price form two bottoms almost same level and the indicator forms bottoms with the second one higher than the first. It is an exaggerated bullish divergence.
The exaggerated bullish divergence signals a strong continuation uptrend .
When you spot this, you can either continue holding your open long position or open a new position.
Trading divergences in forex is like trading any other strategy. It also has its short comings.
Like we said indicators are known to give fake signals most times especially on a smaller time frame.
Always look at a bigger time frame version and make use of other technical tools and candlesticks to come up with a strong judgment.
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