This was a sign that the longer-term uptrend was ready to continue. However, you could just as easily call this “positive divergence”, instead of “hidden divergence”, because essentially it is the same thing. Obviously, this can happen in both directions, but it must be along with the overall prevailing trend to qualify as hidden divergence. This is essentially the same thing as “positive divergence” in what would have been a longer-term uptrend after a pullback. While it essentially means the same thing, it is important to note that sometimes people call this “hidden divergence” instead of positive divergence. Some of the most successful forex traders will tell you that a forex divergence trading strategy is one of the most accurate strategies you can use. This is because the strategy not only makes use of information that is on the charts, but also uses candlesticks that provide clear information about what buyers and sellers are doing in the market.
When price goes up and makes a higher high, we expect the indicator to do the same, make higher highs. If the indicator fails to make a new high and makes a lower high instead, it has diverged from price. Divergence can only exist if we have an ascending slope or descending slope either on the price action or on the indicator itself. Now, the same rules are applied to the bullish divergence, but in reverse. The MACD and Awesome Oscillator are the best indicators to measure such a move. Adding a method to support one’s strategy, and an analysis that has more predictive value could be very useful. By paying attention to instances of strong convergence and strong divergence, you can capture unique trading opportunities that you may not have noticed before.
Volume Indicators
Many traders have found divergence trading strategies to be very useful in helping them determine when to buy or sell. Oscillating indicators are usually attached to the chart, instead of being overlaid on the price. When you look at an oscillating indicator, the values of it should oscillate sideways between an upper and lower boundary to signify overbought and oversold conditions. Regardless of whether there is a clear up or down trend happening in the price. This is what you need to see if you’re looking for divergence with price.
This GBP/USD weekly chart shows several occasions where the price was making higher lows, while the stochastic was making lower lows. This divergence indicates that the retrace down is over and trend continuation is about to resume. Regular divergences are used as a tool to indicate reversals. This EUR/USD monthly chart shows the price making a lower low during a two-day period. But the momentum in MACD and Stochastics didn’t correspond to that of the price action, making higher lows. This signals a possible reversal of the trend or at least a retrace of the downtrend.
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In this manner, the indicator basically has a lagging character. However, the lagging character of the MACD concerns only its primary signal – the crossover signal. However, there is a third kind of a divergence, which does not fall into the regular divergence group. Join thousands of traders who choose a mobile-first broker for trading the markets. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
- A forex trader taking basic RSI signals on their MT4 platform would have had at least 1 losing trade with this example .
- Traders must consider that most of the time Divergence and Convergence are not valid and they do not show correct trend direction due to the fact that they have opposite direction of market trend.
- Trading in CFDs carry a high level of risk thus may not be appropriate for all investors.
- While the price has registered lower lows, the Stochastic is showing a higher low.
- Only in some cases will the currency pair totally reverse for a trend in the opposite direction.
The way to look at RSI is through divergences between price peaks/troughs and indicator peaks/ troughs. Following is a silver chart showing buy and sell point, and failure in trending market. However, the Stochastic Oscillator is an excellent tool for recognizing divergence trade setups. The image below will show you how MACD divergence trading works. The RSI can in addition, be used to spot a bearish pattern of divergence.
Trading Strategy: How To Trade Divergence With Technical Indicators
You can do this by looking at charts and analyzing the price action alongside oscillating indicators. When you see divergence on your chart, it means that there may be a continuation, reversal or correction in the current price trend.
Bearish Divergence
As the name suggests, this is when the indicator changes direction but the price trend does not reverse as the indicator suggested. This will quite often happen when the indicator gets very overbought or oversold. The momentum of the trend will weaken but the trend remains in tact. Using the divergence of a technical indicator from the movement in a market price is a day trading technique especially popular with forex traders.
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This is When price action hits higher highs or lower lows and momentum oscillators doesn’t. A forex trader taking basic RSI signals on their MT4 platform would have had at least 1 losing trade with this example . On the other hand, a trader would have netted two winners and not lost a single trade. This is a 4 hour chart of USD/CHF which shows both bullish and bearish RSI divergence.