Divergence, examples of which can often be seen on the chart in the terminal of the foreign exchange market, is a clear discrepancy between the value of the trading instrument and the indicator indicators. In other words, we can say that the signal on the indicator should be the opposite of that which usually appears when the price reaches a new maximum and minimum. In combination with strong levels, support and resistance lines, trend lines and other signals, the pattern can give a good profit. It can be called an integral part of effective trade. All indicators of the Forex divergence, mainly oscillators, help to clearly identify the discrepancy, since they are ahead of the price movement. The signal is often used by both professional traders and beginners. It allows you to conduct a general analysis of the state of the Forex market and warn of upcoming trend reversals.
Types of divergence
Among the Forex market patterns that appear on the charts most often than others are divergence. Examples of signals can be varied, which stimulated the appearance of several varieties of "inconsistencies." The most common is the classic divergence. The model signals a sharp trend reversal.
It warns the trader about the decrease in momentum and the high probability of the formation of a new peak. For the classical (simple model) divergence, the following features are characteristic:
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Low lows on the price chart coincide with high highs of the oscillator indicators, which signals a trend reversal up. This is a clear bullish divergence pattern.
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High highs on the price chart coincide with low highs of the oscillator indicators, which signals a downward trend reversal. This is a clear pattern of "bearish" divergence.
Class A Divergence
Studying such a trading signal as divergence, it is recommended to study examples carefully. This will clearly distinguish two subtypes of the signal. Let's start with class A divergence. This is one of the strongest trading signals, which indicates a significant reversal of the main trend. With a “bullish” signal, the price of the currency draws a new high, the indicator forms a new low. The secret is that a high minimum does not have a strong impulse to continue moving. With a “bearish” signal, the price forms a new maximum, and the indicator gives the opposite signal. To continue the movement of the pulse is not enough.
Class B divergence
Class B divergence is a weak signal type. It may indicate a gradual change in price movement. This signal requires confirmation. The opening of the transaction should be supported by supporting patterns. “Bullish” divergence is characterized by the formation of a “double bottom” figure, and on the indicator - the formation of a high minimum.
The double base is an area of unstable equilibrium, where there is both the likelihood of the continuation of the trend and its reversal. For a “bearish” divergence, the formation of a double top on the graph and the fixation of a new low maximum on the oscillator are characteristic. It is worth considering the likelihood that the price still has an impulse for a short-term continuation of the movement.
Latent divergence
Often latent divergence forms on the chart. Examples of its formation can be seen quite often. Unlike the correct pattern, the signal indicates the continuation of the trend. “Bullish” hidden divergence is visible when the price fixes new lows on the chart and the formation of new bottoms on the indicator. The “bearish” hidden divergence is characterized by the formation of low highs on the chart and the formation of high highs on the indicator. Signals are effectively used for trend trading, as they allow you to determine the optimal entry point into the market.
Trade: basic settings
Forex divergence can be identified using the MACD indicator integrated in the terminal. For a trading instrument, you need to set the following parameters:
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fast period - 12;
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exponential moving average - 26;
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simple moving average - 9.
All parameters apply to closing levels. Any currency pair and any timeframe can be used for trading. Entering a long position should be done when the price is in a “bearish” trend, and the MACD indicates a “bullish” trend. Entering a short position is necessary with a return signal. “Stop” is set near the closest support level when trading on long positions, and at the nearest resistance level if trading on a short position. “Profit” is set to the next resistance level when opening long positions and to the next support level when opening short positions.
Trade specifics
Considering such a pattern as divergence, examples of it can be seen on absolutely all currency pairs and on all time periods. Experienced traders associate this phenomenon in the market with the need for brokers to lose unprofitable positions. The average frequency of occurrence of a signal is 3-4 times a month for each of the currency pairs. That is why the profitability of this instrument depends solely on the number of currency pairs that are used in trade. Signals are checked by the number of points between the vertices on the graph, both minima and maxima. The take-off run should be between 25 and 50 points, depending on the pair. The more the run-up between the vertices in points, the stronger the signal is considered.
What is the most effective divergence indicator?
In the classical economy, it is customary to use the MACD indicator, which was described above, to search for divergences. Pattern search techniques include the use of a stochastic indicator and OsMa. Experienced traders adapt almost any of the indicator oscillators built into the terminal to search for divergences. The divergence indicator can be set separately. It will signal the appearance of the desired models on the chart, which will reduce the work of the trader.
Everyone has the right to choose the trading instrument that will be most convenient for him to visually perceive. Noticing the formation of a pattern, you need to draw lines and connect the vertices of the highs and lows both on the indicator and on the chart. This will determine the successful entry point into the market. On the chart, divergence does not always look like in the pictures with examples. Shapes can be subtle and distorted. Only long-term experience in the market and tracking the process of working out the figure after a while will make it easy to identify it on the charts. Experts recommend that before starting trading on this signal, study it in history. This will allow you to adapt the visual perception of the market.
Important points, or Beginner's Note
Divergence trading can be used at all time periods, but it is worth remembering that the larger the timeframe, the longer the price will go to its goal. A trend reversal can drag on for a sufficiently long period of time. At low timeframes, you should be careful when using this tool. It often happens that by the time the model is fixed, a price reversal has already occurred. To minimize risks, it is recommended to compare divergence at different time intervals. This technique allows us to come to the conclusion that the divergence of Forex brings the maximum possible profit.
The pattern is one of the few effective signals that are rationally used when trading against the trend. The signal is much stronger than the indicators of all other indicators, both purchased and built into the terminal. The signal is amplified over long time periods. Effectively combine divergence readings with breakdowns of trend lines.
