Divergence, examples of which can often be seen on the chart in the currency market terminal, is a clear discrepancy between the value of a trading instrument and the indicator values. In other words, we can say that the signal on the indicator should be the opposite of what usually appears when the price reaches a new high and low. 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 trading. All Forex divergence indicators, predominantly oscillators, help to clearly identify discrepancy as 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 divergences
Divergence is one of the Forex market patterns that appear on the charts more often than others. Examples of signals can be varied, which stimulated the emergence of several varieties of "inconsistency". mostclassical divergence is considered common. The pattern is signaling a sharp trend reversal.
She warns the trader about the decrease in momentum and the high probability of forming a new peak. The classical (simple model) divergence has the following features:
- Low lows on the price chart coincide with high highs of oscillator indicators, which signals an upward trend reversal. This is a clear bullish divergence pattern.
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High highs on the price chart coincide with low highs of oscillator indicators, which signals a downward trend reversal. This is a clear bearish divergence pattern.
Class A Divergence
When studying such a trading signal as divergence, it is recommended to study the examples carefully. This will clearly distinguish between two subtypes of the signal. Let's start with a class A divergence. This is one of the strongest trading signals that 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 low does not have much momentum to continue moving. With a "bearish" signal, the price forms a new high, and the indicator gives the opposite signal. There is not enough momentum to keep going.
Class B divergence
Class B divergence is a weak type of signal. It may indicate a gradual change in price movement. This signal requires confirmation. Opening a dealmust be supported by supporting patterns. A bullish divergence is characterized by the formation of a “double bottom” pattern, and the formation of a high low on the indicator.
Double bottom is an area of unstable balance, where there is both a chance of a trend continuation and a trend reversal. A bearish divergence is characterized by the formation of a double top on the chart and the fixation of a new low high on the oscillator. At the same time, it is worth considering the possibility that the price still has momentum for a short-term continuation of the movement.
Hidden divergence
Hidden divergence often 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 forms new bottoms on the indicator. 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 effective for trading with the trend, as they allow you to determine the optimal entry point to the market.
Trading: basic settings
Forex divergence can be identified using the MACD indicator built into the terminal. For a trading instrument, you need to set the following parameters:
- fast period - 12;
- exponential moving average - 26;
- simple moving average - 9.
All parameters apply to close levels. Any currency pair and any timeframe can be used for trading. A long position should be entered when the price is in a bearish trend and the MACD indicates a bullish trend. You need to enter a short position at the opposite signal. The stop is set near the nearest support level when trading long positions, and at the nearest resistance level if trading short positions. "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 dump unprofitable positions. The average frequency of signal occurrence 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 trading. Signals are checked by the number of points between the tops on the chart, both lows and highs. The run-up should be from 25 to 50 points, depending on the pair. The greater the run-up between peaks in points, the stronger the signal is considered.
Which divergence indicator is the most effective?
In the classical economy for searchdivergences, it is customary to use the MACD indicator, which was described above. Pattern search methods include the use of a stochastic indicator and OSM. Experienced traders adapt almost any of the oscillator indicators built into the terminal to search for divergences. The divergence indicator can be set separately. It will signal the appearance of the desired patterns 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. Having noticed the formation of a pattern, you need to draw lines and connect the tops of the highs and lows both on the indicator and on the chart. This will allow you to determine a good entry point into the market. On the chart, the divergence does not always look the same as in the pictures with examples. Figures can be subtle and distorted. Only long-term experience in the market and tracking the process of working out a pattern over time will allow you to easily identify it on the charts. Experts recommend that before you start trading on this signal, study it in history. This will adapt the visual perception of the market.
Important points, or Note to the Beginner
Divergence trading can be used on all time frames, but it is worth remembering that the larger the time frame, the longer the price will go to its target. A trend reversal can drag on for quite a long period of time. On low timeframes, you should be careful when using this tool. Oftenit happens that by the time the pattern is fixed, the price has already reversed. To minimize risks, it is recommended to compare divergence at different time intervals. This technique allows us to come to the conclusion that Forex divergence brings the maximum possible profit.
The pattern is one of the few effective signals that are rational to use when trading against the trend. The signal is much stronger than all other indicators, both purchased and built into the terminal. The signal is amplified over long time periods. Effectively connect divergence readings with breakouts of trendlines.
Divergence in sciences
It is not only in the Forex market that one can encounter such a phenomenon as divergence. Evolution has led to the fact that the concept is considered one of the fundamental in physics. This is the basic concept of the theory, the foundation of almost all physical language. According to classical science, divergence also occupies a central place in it. Fields are considered to be not only the dominant tool in calculations, but also an important idea. It acts as a statistical backbone. The divergence of the rotor, field, flow of substances is widely applicable in most exact disciplines.
In electrodynamics, the divergence of the rotor is used as the main construct in two of the four equations of Maxwell himself. The main equation in Newton's theory of gravity in field format contains divergence. It is also found in tensor theories, including general relativity. In turn, general relativity is part of a large number of modern theories. The parameter is widely used in the geometric aspect. Divergence is applicable to material flows, to the speed of flow of gases and liquids, to the density of electric current. The concept is very versatile and has managed to find its place even in the international currency market.
