What is a Divergence Trading

Have you ever heard of divergence trading in Forex? If you ever wonder there was a way to sell at the top or buy close to the bottom of a trend without having too many risks, then it's time you meet the term Divergence trading. You are probably thinking what if you could know ahead of time when to exit so that your unrealized gains won't just be wasted simply because the trade reverses its direction? On the other hand, there are certain times that you believe a certain currency pair will go down but you don't want to take much risk or you want to go short at a better price. So what you do? Again, you should know about divergence trading. 

Let's discuss this further below

Divergence trading actually works by measuring the price action in relation to a certain oscillator indicator. In reality, it doesn't matter what oscillator you want to use. It can be a CCI, MACD, RSI, or even a Stochastic among many others. The good thing about understanding divergence trading is that it is a great leading indicator in Forex trading. After couple of practices, you get to spot without much difficulty. If you learn to trade properly with divergence, you'll consistently profit. At the same time, the risk on your trade is very small relative to your potential gains if you buy near the bottom or sell near the top. Thus, that means more money for you!

When doing divergence trading, it is important to remember the terms "Higher Highs" and "Lower Lows". This means that if the price is on the higher side, then the oscillator should also be the same. At the same time, if the price is falling down, then the oscillator should also remain low. Now, if the price and the oscillator are deviating from each other, then we have what we call divergence.

Types of divergence 

There are generally two kinds of divergence. There's the regular divergence, then there's the hidden divergence. The regular divergence is usually a sign of trend reversal. So if you see that the Euros are going up as compared to the US Dollar, then a regular divergence occurs. Then it is most likely that the trend will reverse. The US Dollar will go up and the Euros will go down. Now there are also two types of regular divergence. When the price is making lower lows or LL, while the oscillator is making higher lows or HL, then this is called the regular bullish divergence. On the other hand, if the price is instead making higher highs or HH, while the oscillator is making lower highs or LH, then this is called the regular bearish divergence.

Now, let's take a look at the hidden divergence. The hidden divergence is a sign that a trend will continue. This means that if the US Dollar is on the rise, it will continue to go up. Again, there are two types of hidden divergence just like the regular types. The hidden bullish divergence is when the price is making a higher low or HL, while the oscillator is lower low or LL. The hidden bearish divergence is when the price is making a lower high or LH, as the oscillator is making a higher high or HH.

About the Author:

The article is written by Steve Bob.