Divergence trading is an advanced trading technique that is useful in identifying continuations or reversals. This method looks at the highs or lows of price action as well as the highs and lows of the oscillator. There are four main kinds of trading divergences.
First is the regular bullish divergence. This takes place when the currency pair has lower lows but the oscillator has higher lows. As a reversal indicator, it shows that the downtrend made by the previous lower lows in price is about to be reversed and that an uptrend is ready to take place.
Second is the regular bearish divergence. Opposite to the regular bullish divergence, this signals that a downtrend is about to take place. This reversal signal happens when the currency pair makes higher highs but the oscillator shows lower highs, indicating a possible downtrend.
Third is the hidden bullish divergence. This takes place when the currency pair draws higher lows while the oscillator sketches lower lows. It is used in predicting a possible continuation of the current trend. Price has higher lows during and uptrend and a lower dip by the oscillator reflects more buying energy to take the pair higher.
The last kind is known as the hidden bearish divergence. The opposite of the bullish divergence, it is used to predict a continuation of the current downtrend. This happens as price makes lower highs while stochastic has higher highs, indicating that sellers have enough fuel to push the pair lower.
There are some conventions when identifying divergences but this depends on how strict you are with price signals. Highs in the oscillator are typically marked as the peaks but stricter traders want the oscillator to be above 80 to be considered a high. On the other hand, lows are marked as troughs but stricter traders want it to be below 20 to be considered a low.
First is the regular bullish divergence. This takes place when the currency pair has lower lows but the oscillator has higher lows. As a reversal indicator, it shows that the downtrend made by the previous lower lows in price is about to be reversed and that an uptrend is ready to take place.
Second is the regular bearish divergence. Opposite to the regular bullish divergence, this signals that a downtrend is about to take place. This reversal signal happens when the currency pair makes higher highs but the oscillator shows lower highs, indicating a possible downtrend.
Third is the hidden bullish divergence. This takes place when the currency pair draws higher lows while the oscillator sketches lower lows. It is used in predicting a possible continuation of the current trend. Price has higher lows during and uptrend and a lower dip by the oscillator reflects more buying energy to take the pair higher.
The last kind is known as the hidden bearish divergence. The opposite of the bullish divergence, it is used to predict a continuation of the current downtrend. This happens as price makes lower highs while stochastic has higher highs, indicating that sellers have enough fuel to push the pair lower.
There are some conventions when identifying divergences but this depends on how strict you are with price signals. Highs in the oscillator are typically marked as the peaks but stricter traders want the oscillator to be above 80 to be considered a high. On the other hand, lows are marked as troughs but stricter traders want it to be below 20 to be considered a low.
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