How to trade divergence - a step-by-step guide for a trader. Understanding in detail - what is divergence? Divergence trading
Divergence is one of our favorite trading concepts because it provides very reliable and high quality signals that can be used in combination with other trading tools and concepts.
RSI compares the average gain and the average decline over a given period. For example, if you have RSI set to 14, it will compare bullish and bearish candles among the last 14 candles.
When the RSI value is low, it means that out of the last 14 candles, there were more bearish candles and they were stronger than bullish ones.
If the RSI value is high, this means that among the last 14 candles, more and stronger were bullish.
#2 When RSI Divergence Forms
Knowing when an indicator is high or low is important when interpreting divergences.
We usually encourage traders to look beyond the indicator lines to see what is really going on.
During trends, you can use the RSI to compare individual trend waves and thus determine the strength of the trend.
The screenshot below shows all three scenarios.
- Typically, the RSI makes new, higher highs during healthy and strong bullish trends. This means that there were more bullish candles in the last trending wave, and they were larger compared to the previous wave.
- If the RSI makes these highs during an uptrend, it means that the momentum of the trend has not changed. When the RSI makes an equal top, it does not qualify as a divergence, and simply means that the strength of the uptrend is still growing steadily. Rising highs in the RSI do not indicate a reversal or weakness. They just show that the trend will develop further without abrupt changes.
- When you see price making a higher top during a bullish trend, but a lower top is forming on the RSI indicator, it means that the last bullish candles were not as strong as the previous price action and the trend is losing momentum. That's what we call divergence or divergence and in the screenshot below, the divergence signaled the end of an uptrend about the possible start of a downtrend.
#3 Conventional technical analysis is wrong
Classic technical analysis says that a trend exists when price makes higher tops.
But, as is often the case, the generally accepted view is not entirely correct and oversimplifies things.
A trader who only relies on highs and lows to analyze prices often misses important clues and does not fully understand market dynamics.
Even if the trend at first glance looks like “ healthy” (the chart shows higher highs and higher lows), if you look deeper, it may turn out that he is losing momentum in this.
Thus, a divergence in the momentum indicator suggests that the momentum in the trend is changing and that the potential end of the trend may be close, although this is not yet visible on the chart.
How to trade divergence - optimal entry points
We trade only for turns, and transactions that are formed at the beginning of a new trend after a divergence are our bread and butter.
Divergence does not always lead to a strong reversal, and often the price after it simply enters into a consolidation with a sideways movement. Keep in mind that a divergence only signals a loss of momentum, not necessarily a complete trend reversal.
To avoid deals that go nowhere, we highly recommend that you add other confirmation criteria and tools to your arsenal.
Divergence by itself is not a very strong signal, and many traders get poor results by trying to trade only it.
As with any strategy, you need to find additional confluence factors for this strategy to be strong.
Below we see how the price made two divergences but never started to fall. Thus, divergence simply highlights short-term consolidation.
Location in trading is a universal concept, and regardless of your trading system, adding a location filter will always improve the quality of signals and trades.
Instead of entering trades based only on a divergence signal, you should wait until the price moves to the previous support or resistance zone, and only then look for divergences and trend changes to select an entry point.
The screenshot below is a perfect example. On the left, you see an uptrend with two divergences.
However, the first case turned out to be completely unsuccessful, while the second brought a big win. What is the difference?
When looking at the higher time frame in the image on the right, we see that the first divergence has occurred.” in a vacuum“, and the second formed at a very important resistance level (yellow line and arrow).
As a trader, you first identify areas of support and resistance and then wait for the price to come to you. This approach will have a very significant impact on your performance.
Divergence is a very powerful trading concept and a trader who understands how to trade it in the right market context with the right signals will be able to develop a solid trading methodology and effective method study of price movement.
In technical analysis, a significant place in determining the points of the beginning of correction and trend reversal, the search for optimal entry points is given to oscillator signals. At the same time, for a set of difference (differential) algorithms used to calculate indicator readings, the instruments form leading signals (compared to trend ones), but react even to minor changes in the price of an asset. As a result, a significant number of false signals, following which can lead to losses.
To eliminate this shortcoming of oscillators, traders use various filtering techniques - confirmation of signals by other indicators, use graphic models on oscillator charts. Among the most effective, well-known and reliable options is the search for divergences.
The concept of divergence implies a discrepancy in the nature of the movement of the price chart and the oscillator line. In trading, it is customary to consider such a situation as a signal indicating a reversal or continuation of a trend with a high degree of probability. It is formed on any oscillators, is easy to recognize and can be used even if the market player does not have significant experience.
However, not all traders pay due attention to this element. technical analysis. Moreover, some are not familiar with the terms at all, and certain types of models are unknown even to experienced users.
What it is?
In general, when conducting technical analysis, when considering the price charts and the oscillator together, 2 similar phenomena are observed:
- Divergence or divergence of charts ( from lat. divergo I mean decline).
- convergence or convergence ( from convergo means close).
Since the differences in the generated signals are determined only by the directions of the graphs, and their interpretation is subject to general rules, in the everyday life of traders, the term “divergence” is mainly fixed.
The formation of divergences is possible on all known oscillators / advisers - from MACD, Stochastic, h4, RSI and CCI to the original developments of traders. The rules for their use are described in detail in technical analysis books and indicator guides.
Any divergence (convergence) occurs when new extremums formed on the price chart during directional movement do not find their confirmation on the indicator charts. An example is the classic version of a bearish divergence, when the formation of new highs on the price chart in an uptrend corresponds to the appearance of the highs of the oscillator, but forming a descending sequence.
In other words, divergence/convergence is a situation of inconsistent (in different directions) movement of the price chart and the line of a technical indicator (oscillator), which is tracked when neighboring extrema of the same name (highs/lows) are formed.
The nature of divergences (convergences)
In order to accurately identify the convergence / divergence on the chart and correctly interpret the market state corresponding to the model, it is necessary to understand the essence of the phenomena.
Since the price chart represents the real market situation, and oscillators express the interest (activity) of trading participants with a sufficient degree of accuracy, the mismatch in the directions of movement can be considered from the following positions:
- As long as the expectations (moods) of traders coincide with the development of the trend, and the actions are aimed at supporting it, a healthy trend is reflected on the charts. Extremes on the price chart and in the oscillator window are formed in a coordinated manner, with simultaneous updating of highs or lows.
- With the development of the trend, the number of players making deals in the dominant direction grows and eventually reaches a maximum. The inertia of the thinking of the “crowd” (the bulk of traders) continues to support the trend (“latecomers” strive to realize at least part of the movement by opening trades along the trend). At the same time, the interest of market participants in the development of the situation begins to decline, which is reflected both in volumes and in oscillators. As a result, the price updates the extremes (although the growth rate decreases), and the indicators clearly show a change or fading of the trend (new extremes are worse than the previous ones), which forms the model.
Model definition
Divergence/convergence becomes a signal that traders are less interested in maintaining the current trend. However, it is wrong to interpret it unambiguously as a reversal.
- Divergences indicate the likelihood of a trend change or the beginning of a correction. But such a development of the situation is not necessary - the appearance of another powerful price impulse can hold the movement, turning the signal into a false one. Accordingly, the formation of a new price wave needs to be confirmed by patterns on the chart, other technical analysis tools (for example, trend indicators).
- The angle between the lines drawn on the charts is perceived by traders as the “strength” of the generated signal. In fact, the magnitude of the mismatch (angle) does not provide reliable information about the increase in the probability of a reversal, and even more so, about the scope of the further movement.
- The judgment about the predominant use of the signal in countertrend trading is wrong. Divergences/convergences that indicate the development of a trend are no less effective than those that signal a change in direction.
The main advantage of using models is their versatility:
- convergence / divergence of price charts and oscillators is observed on most of the latter and effectively on all markets, assets, timeframes;
- models are suitable for building trading systems and strategies based on trend following, trading from borders price channels, including against trends, swing trading.
At the same time, the exact construction of divergences, when confirmed by other tools, guarantees high accuracy of decision making.
How to draw on the chart?
To search for and identify divergences, you need to know 2 basic rules for graphical model building:
- On the price chart, another extremum (peak or trough) is formed, which is preceded by at least one more of the same name. At least 2 extrema of the same name following each other is a prerequisite for the model. It is possible to build on a larger number of highs / lows, which adds reliability and strength to signals.
- On the oscillator line at the moments corresponding to the extremums of the price chart, extrema of the same name are also formed.
In the trading terminal, the sequence of actions is as follows:
- Determine the extremum closest to the current price level.
- Find the one with the same name next to it.
- Connect the obtained points with a line.
- Draw vertical lines along the extremes of the price chart until they intersect with the oscillator chart.
- In places of intersection with the indicator line, mark the corresponding extremums.
- Connect them and visually determine the divergence from the segment on the price chart.
Traders need to avoid a few common mistakes:
- The search for models is carried out on a trend area with pronounced extremes. With a horizontal movement, it is wrong to count on the appearance of divergences and on the correct interpretation of incoming signals.
- When forming the next extremum, opposite to the last formed one, you should switch your attention to it when looking for divergence. Practice shows that the formation of a new signal cancels the previous one (significantly reduces the likelihood of its implementation in the price).
- Convergences/divergences should be considered only synchronously - in the window of the price chart and the oscillator, extreme points are analyzed that form at the same time points.
If the algorithm and rules are observed, it will not be difficult to detect divergence/convergence even for an inexperienced bidder.
Forex Divergence Indicators
Question about divergence indicators in Forex, stock exchange and others financial markets has two meanings:
- oscillators on which the pattern search is recommended;
- automation tools for building and identifying divergences/convergences for technical analysis tools.
Oscillators and divergences
The theory of technical analysis states that convergence/divergence patterns work equally well on any oscillators.
At the same time, the experience of analysts and traders shows that practical application is preferable on charts that do not have a saturation effect.
Indeed, the algorithms of such indicators as Stochasic, RSI and similar ones assume the assignment of minimum and maximum values to indications under certain conditions (for example, for stochastics - 0 and 100%). This leads to the exclusion of some real extremes from consideration, which makes it difficult to search for and analyze divergences.
As a result, it is proposed to consider indicators without pronounced boundaries and overbought/oversold zones as the best option for work, for example, MACD, ROC, TRIX and the like.
However, all necessary constructions are also effective for classical oscillators with restrictions. The only obligatory condition is the fulfillment of the “rule of 5%”. In accordance with it, it is necessary to choose the indicator calculation period and other important parameters so that the indicators are in the active zone (between overbought/oversold zones) 95+% of the time. In addition, the strength of the signals formed in the overbought/oversold zones increases.
Divergence indicators
Automating the process of graphical model building and identification of convergence / discrepancy will save the user time and reduce the number of subjective errors. To solve the problem, traders have developed a large number of original indicators.
The list of developments should include:
- MACD Divergence. One of best indicators to determine the convergence / divergence on the MACD. It reveals both classic and hidden divergences (more on the types of models - see below), visualizes the lines on both charts (can be disabled), shows the expected direction of movement (arrows) after the signals are realized.
- Stochastic Divergence. Works with the standard stochastic oscillator. Draws lines for divergences in the price and indicator windows, highlights bearish and bullish patterns.
- Divergence Panel. Informational indicator based on the classic MACD. The panel displays currency pair, time frame, type of divergence (bullish or bearish), distance from the moment of formation of the model to the current bar. The main advantage is that it works simultaneously with all time frames and major currency pairs. When you press the Chart button in the panel line, the corresponding chart is visualized.
- Divergence Viewer. Information indicator that defines divergences various types(classic A, B, C and hidden) for several oscillators - MACD, RSI, RVI, Momentum, StDev, Stochastic, etc. When a model is detected, it gives a signal (Alert) displaying the type of signal and the type of convergence / divergence, timeframe in the window.
- Set of indicators of the TT series– CCI Trix Divergence TT, CCI VWMA Divergence TT, S-ROC TT, Super Stochastic DA TT, etc. Author's developments are built on various oscillators and determine divergence/convergence models with high accuracy.
It should be noted that due to the calculation of historical data with a large number of conditional statements in the code, the performance of almost all indicators leaves much to be desired. Their massive use requires powerful hardware to install a trading terminal.
The best option is independent construction, since it does not require a special level of training, a significant investment of time and solves the specific tasks of a particular vehicle. In addition, most instruments do not detect all types of divergences.
Kinds
Models of convergence / divergence are usually divided into several types:
- Depending on the type of signal - bullish (with a likely increase in price) and bearish (with a decrease).
- According to the configuration of the lines - classic (there are additionally three types - A, B, C or I, II, III), hidden and extended.
classical
The classic or conventional countertrend divergence is the most obvious and easily recognizable version of the pattern. The search is carried out with a clear directional movement of the asset (price chart). It is considered a reversal signal, the appearance of which indicates an increasing probability of a trend reversal (the start of a correction wave).
The probabilistic nature of the signal requires confirmation.
Depending on the market situation (read, the relative position of completed lines on the charts), it is divided into several classes (types).
"Class A" Divergence (Type I)
A Class A (Type I) bearish countertrend divergence occurs on an uptrend.
The model appears as follows:
- As the price of an asset rises, successively increasing highs are formed on the chart (each peak is higher than the previous one).
- In the oscillator window, the moments of extremums of the price chart correspond to decreasing peaks - the next extremum is located below the previous one.
It is obvious that the lines connecting the maxima of the graphs diverge. The presence of such a divergence indicates the exhaustion of the bullish trend and the possible beginning of a bearish (or bearish correction).
The signal is considered strong (and therefore belongs to the highest class or the first type). However, even in this case, we can only talk about the likelihood of a reversal, and opening a position requires confirmation. As a confirmation signal, it is enough to consider the exit of the oscillator from the overbought zone or the location of the MACD histogram bars below the signal line.
According to traders, the angle between the divergent segments on the charts determines the strength of the signal (first of all, the duration or scope of a new trend or correction). However, no mathematical or statistical substantiation of this point of view has yet been given.
The classic bullish divergence (more precisely, convergence) of type I (class A) is considered in a similar way, but on a downtrend. On the price chart, the main element of the pattern are lows with successive declines. They correspond to increasing (each next one is higher than the previous one) lows of the oscillator.
The formation of a divergence (convergence) indicates a bullish reversal (a change from a downward price wave to a rising one). Assessing the strength of the signal and its reliability are similar to the bearish divergence.
Divergence "Class B" (Type II).
Similar to the previous option, type II (class B) divergence is subdivided into bearish and bullish. The first is formed during the period of growth in the price of an asset, the second - on the wave of a fall. The pattern also builds on the highs (bearish) and lows (bullish) of the price chart and indicator.
It differs from a strong (A or I) minimum difference between the prices of the last two extremes of the price chart - in fact, a double top or double bottom is formed with highs or lows at the same level (close levels with a difference of several points). The oscillator line, on the other hand, makes lower highs on bearish divergences and higher lows on bullish divergences.
The generated signal refers to the reversal of medium strength. It becomes reliable if there is a strong confirming one, for example, when the main MACD line crosses the zero level or the axial line of the oscillator chart (50% for RSI and Stochastic, 0 for CCI).
"Class C" divergence (type III)
When building a model, the classical conditions of divergence (convergence) are used:
- bearish is formed in an uptrend, bullish in a downtrend;
- the formation involves rising highs for a bearish divergence, falling lows for a bullish divergence.
The peculiarity of the model is the minimum difference between neighboring extremums on the oscillator chart (double top or double bottom) and a consistent increase or decrease in extremums on the price chart.
The resulting signal is interpreted as weak, in which the probability of trend continuation is higher than its reversal. Traders are advised to ignore its appearance, and the condition for trading a type III (class C) divergence is the appearance of a strong reversal signal on other indicators or the price chart.
Hidden
This kind of convergence/divergence of the charts is also considered a pattern that generates strong trading signals. But, unfortunately, when building strategies and TS, most traders ignore it (some of it is simply unknown).
The principle of its formation is opposite to the classical version, and the result changes accordingly.
Hidden bearish divergence.
A bearish pattern is seen on a downtrend (bearish trend). To build a line on the quotes chart, a search for highs is carried out, and each next one must be lower than the previous one.
Divergence (more precisely, convergence) is formed when the falling peaks of the price chart correspond to the updated highs of the oscillator.
Such a configuration clearly shows an increase in the interest of traders in trading during a fall in asset prices and serves as a strong signal for the development of the mainstream. Experienced Traders and analysts advise considering opportunities to sell or increase short positions.
Any confirmation is required to implement the signal.
Hidden bullish divergence.
By analogy with the hidden bearish convergence, the rules for identifying the hidden bullish divergence are formulated:
- the model works on an uptrend (bullish);
- when the price rises, local minima (troughs) of the price chart are considered with an increase in the level of each next one relative to the previous one;
- on the oscillator, at the moments of key price extremes, a sequence of lower lows is formed.
The signal indicates the continuation of the uptrend. When confirmed, long positions are opened or increased.
Extended
The model of extended divergence in some moments is similar to the classical class B (type II) divergence. However, the specificity of the formation leads to its rather rare appearance on the charts.
Extended bearish divergence.
The extended bearish divergence model considers not adjacent extremums, but peaks in the price chart, between which there may be several local highs/lows. In fact, there is an expansion of the time range, which gave the divergence its name. The construction condition is the approximate equality of the levels of the maxima (the “double top” figure).
At the same time, on the oscillator chart, the highs corresponding to the selected price extremes decrease, and the distance between them turns out to be significant.
The signal indicates a continuation of the downtrend and is considered strong (or medium strength). As with other options, confirmation is required.
Extended bullish divergence.
An extended bullish divergence requires the presence of two price lows at the same level (or with a minimum difference) - a “double bottom” and a significant increase in the lows of the oscillator.
When confirmed, the signal is considered as bullish, a continuation of the uptrend.
Divergence trading
The technique of trading on convergence/divergence signals is quite simple.
- When an extremum is formed on the price chart, the peaks/bottoms closest to it and the corresponding peaks/bottoms on the chart in the oscillator window are analyzed.
- When a divergence is detected, the model is identified and its potential is evaluated (strong, medium, weak).
- When a confirmation signal appears, a decision is made to conclude new deal, increasing volume or closing positions.
In fact, such an algorithm can form the basis for a profitable vehicle, since models appear on the market often. There is only one obvious drawback in its use - the divergence does not carry information about the potential scope of the movement. Therefore, it will be necessary to determine the goals and levels of fixing profits or losses using other tools.
Thus, the appearance of divergences on the charts of the price and the oscillator should definitely attract the attention of the trader. Divergences/convergences are considered as convergence/divergence of the price and indicator lines in a directional movement and, in most cases, become a source of strong or medium strength trading signals. However, regardless of the type of model (classical, hidden, extended), they are probabilistic in nature and need to be confirmed. For use in the TS, builds can be carried out independently or installed in trading terminal original indicators.
Hello friends.
Some forex traders consider oscillators to be the holy grail of technical analysis. Others believe that these tools are practically useless. The truth, as always, lies somewhere in the middle.
Classic Forex divergence is an imbalance between the real price movement and oscillator indicators. The theory is that a skilled trader will use this imbalance to find great trade signals. So today I propose to get to know the topic better and find out if everything is really so.
If we apply this term to Forex, then this is the discrepancy between the real price of a currency pair and technical indicators. The most popular for detection are MACD, Relative Strenght Index (RSI) and Stochastic Oscillator.
Moreover, to work with them, you do not need any witchcraft - in 90% of cases they are all used with standard settings for their timeframes.
Forex divergence is both a concept and a trading strategy developed by Charles Dow after observing the price correlation between the related indices Dow Industrials and Dow Transportation.
The Dow was the first to notice when a divergence appeared between them, this led to a break in the trend and changes in the markets. This formed the basis of the theory, which soon turned into an independent one. trading system on Forex.
Examples
The word itself means division, which is exactly what we are looking for. Oscillators usually follow the price. Divergence occurs when the real price on the chart breaks away from the indicators, they start moving in different directions.
For example, when downtrend in Forex, prices must constantly decline. To find divergence in the currency pair we are interested in, we draw a line following the peak lows on the chart and in the indicator window.
After that we compare them. If the line is descending on the chart, but the chart shows higher lows that bring the price flat or turn it in the opposite direction, this is exactly what we are looking for!
Types of divergence
Bullish is defined exactly the opposite. If we see a steady trend on a bare chart, and the lows form a straight downward line, but the oscillator does not repeat this picture and shows higher lows, this is a classic Forex bullish divergence.
Hidden bullish divergence in Forex occurs if each new low is higher than the previous one, and on the oscillator the picture is completely opposite.
It is confirmed by the presence of distinct patterns on the price chart (for example, a double top or a double bottom). But there is a deviation on the oscillator.
Identification rules
Forex divergence is found using a naked price chart and various technical analysis indicators.
Indicators for determining divergence in Forex
Forex divergence is usually determined by comparing price movements on a bare chart and an oscillator. Of the latter, the regular Stochastic, RSI and MACD are more commonly used. For a more accurate result, you can use one of the volume indicators (for example, OBV).
How to build a divergence
If output step by step instructions, then it will look something like this:
- Let's get acquainted with the situation in Forex. We look at the chart and look for such signs: each new maximum is higher than the previous one; each new low is lower than the previous one; the movement is cyclical (for example, a double top or double bottom is formed). If we see such a picture, we start looking for Forex divergence.
- Draw trend lines. The trend needs to be confirmed. Therefore, right on the monitor or paper printout, we draw a line from the previous minimum or maximum to the next, ignoring the small “ripples”. My advice: the higher the timeframe, the easier it is to do this. Therefore, it is better to train on weekly or monthly rates.
- We connect indicators. So, we have connected the peaks and drawn a trend line. Now we open the indicator and see how its readings correlate with the real price movement. We also draw lines.
- We compare prices. If the price lines are identical, it means that it is moving along the trend, there will be no shocks in the near future. We will learn about Forex divergence when the slope of the lines connecting the lows and highs begins to differ.
Use in various trading strategies
As you know, the best is the enemy of the good. Today, traders have many different authoring programs and advisors in their arsenal, and classic tools are fading into oblivion. But in this case, no miracles are needed.
Divergence trading with the macd indicator
The easiest and most reliable option is trading with the MACD. Its signals are as simple and clear as possible, so using it, we will certainly not make mistakes.
Here you can see the price slowing down after a strong bearish trend. First, it corrects, and then goes down again, forming a new low. At the same time, the MACD shows that the low is higher than the previous one. This suggests that the trend has “run out of steam”, the price is likely to go up.
The right moment to close the deal
Two points:
- For sale. If the price goes up, and a divergence appears on the MACD (it turned down on the oscillator), then you need to wait for the current candle to close, and then immediately open a sell trace.
- For purchase. We act similarly. If there is a confident descending line on the chart, and on the oscillator it went to the side or up, we wait for the current candle to close and open a deal.
If it is not possible to constantly monitor open orders on Forex, I recommend setting stop losses within 10-20 pips below or above the closed candle.
Conclusion
As you can see, trading on Forex divergence (especially on the classic bullish or bearish) is not difficult, and the search for the price divergence itself is quite a simple task.
It is this simplicity that makes it a wonderful tool in the arsenal of both the beginner and the pro. No heaped super-secret settings - everything is simple and clear as daylight.
You just need to have enough patience and perseverance to monitor the data for hours, days and weeks. Maybe that's why many traders, especially beginners, often underestimate it.
Thank you for attention. I hope this material was useful to you. Reposts and discussions are welcome.
Strategies using Forex divergence are a comparison of price indicators with. Also, it can be comparing different graphic characters or finding the difference between certain characters.
Today we take a look at the best trading strategies using divergence for working on Forex, as well as for binary options.
Concepts of divergence and its use in Forex strategies
Before looking at the best trading strategies using divergence, let's remember what a divergence actually is.
So, divergence is essentially an early sign of how Forex will behave in the very near future.
Typically, at turning points, the market peaks (either up or down) and the divergence indicates that it is no longer strong enough to continue in the same direction.
In various dictionaries, you can find different interpretations of the term "divergence":
- discrepancy,
- disagreement,
- direction change,
- deviation and the like.
When conducting a technical analysis, the divergence is manifested, as mentioned above, in the discrepancy on the chart of the direction of price movement with the direction of movement of certain indicators.
A divergence is considered manifested when the price on the chart reaches its highest maximum, while the indicator forms this maximum at a lower level. This picture is evidence of the weakening of the market and indicates the existence of a high probability of its reversal in the very near future or a price correction.
Regarding the types of divergence, there are a large number of them, and it makes no sense to consider them all. We list only the main types, these are ordinary or classic divergence, hidden and extended. The classic divergence is the most common of all listed and can be observed at the time of a market trend reversal.
Only 25% of traders who use standard divergence in their strategies can tell about hidden divergence. Typically, a hidden divergence will be a sign that the trend will continue. An extended type of divergence is also a sign of trend continuation, but very few market participants know about this type, although during trading it is one of the most powerful signals to use.
Strategies using MACD and RSI divergence
Considering the best trading strategies using divergence, we want to draw your attention to a very simple, but at the same time quite effective system using indicators. This Forex strategy can be equally successfully used by both beginners and already experienced market participants.
The strategy under consideration provides for trading in any currency pairs that have direct quotes (of the form: EUR/USD, USD/JPY, GBP/USD, and the like).
We will define the state of divergence MACD indicators and RSI with the following parameters:
- MACD (5, 34, 5) or (12, 26, 9);
- RSI (averaging period 5, indicator period 14);
- timeframe on the chart - 1 hour.
We note right away that these parameters were obtained during real trading and are considered the most effective, but if desired, they can be changed by selecting them experimentally.
So, how does this strategy trade using divergence?
Naturally, we wait until a divergence forms on our chart, and we determine the levels at which we will be. There may be two options here.
First- when the formation of divergence occurs during the breakdown of the resistance level.
In this case, StopLoss is approximately set 20-30 points further than the level of the shadow of the previous candle (depending on the volatility of the current asset). TakeProfit is set at the level where the divergence began directly (for the price, this is an almost guaranteed target).In the second case, as in the first one - we are waiting for the formation of a divergence, we also place a stop order 20-30 points further than the level of the shadow of the previous candle, here the target for TakeProfit will be the middle of the trading channel. In the event that the price has not rebounded from the middle of the channel, we set an additional (second) target on the opposite wall of the trading channel.
We enter the position (sell/buy) only after the confirmation candle is formed.
Strategies using divergence, according to the MACD indicator
The best divergence trading strategies, you guessed it, are based on readings. To be more precise, such Forex strategies use the divergence between the price line on the chart and the MACD indicator line.
So, to apply this strategy using divergence, any time frame and any currency pair will do. Add MACD to the chart with a fast EMA period of 12, a slow EMA period of 26, and a MACD SMA with a period of 9.
Entering a long position when the price is bearish and the MACD is bullish. Short position, necessarily opens with opposite indicators - the price is moving along a bullish trend, and the MACD shows a bearish trend.
StopLoss for long positions, set to the near support level, and for a short position, to the near resistance level. TakeProfit in long positions is set to the next resistance level, but for short positions, respectively, to the next support level.As you can see in the chart above - price line is falling in a bearish trend, while our MACD, on the contrary, is growing in a bullish direction. The entry point is marked at the level where it is already clear that the downtrend is ending. We set StopLoss at the support level, and TakeProfit at the resistance level, which was formed on short pullbacks of the bearish trend.
Binary Options Divergence Strategies
Divergence strategies are not only used in the Forex market, they are also great for binary options. Consider one of these strategies using . This strategy works on the H4 time interval, which is optimal for generating reliable signals of divergence.
So, we set an oscillator with parameters 3, 5 and 9 on the price chart and wait for a divergence signal. Divergence in this case will be active only after a closed candle appears. Then you buy an option to increase, well, or to decrease, depending on the direction indicated on the chart by the Stochastic reversal line formed by the divergence.
The expiration time for this strategy using divergence for binary options on the H4 time frame is from 12-16 hours.
We note right away that it makes sense to use this strategy for options only with a pronounced trend, that is, it is better to use assets whose price charts have a clear trend direction. This is due to the fact that during the lateral market movement divergence occurs much more often than during a trend, but its signals are mostly false or the price movement after that has practically no power.
Divergence strategy with placing orders