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The downtrend continues. Extended divergence forex is similar to the hidden divergence. However, the extended divergence often fails to observe the basic rules as it frequently occurs in sideways trends. Many traders do not consider the extended divergence as a trading signal, suggesting it be a false one. Extended bullish divergence is accompanied by rising lows. In the bearish divergence, the highs are getting lower. Let us see the examples in the table. The above figure displays the extended bullish divergence on the MACD indicator.
The price lows are roughly equal slight deviations are acceptable. However, the MACD second low is higher than the first one. This divergence signals the uptrend continuation. The bearish divergence is also identified based on the indicator data; the MACD paints a lower high. It means that the price will continue falling, so one could enter a short position.
There could be slight deviations, but the highs are roughly equal in the first and second charts. The signal appears in the sideways trend, which is a typical feature of the extended divergence. Beginner traders often come across false information about divergences on the Internet. Below I will discuss the most common mistakes when trading with divergences:.
On many Forex trading websites, I noticed that authors wrongly identify divergence. They suggest that if the indicator is moving up, the line drawn across the indicator peaks is showing real highs. Based on this, they connect the highs in the price chart with the line.
Similarly, in the case of the downtrend, when the indicator highs are below the zero line, they connect the price lows in the chart. In other words, they believe that if the indicator shows a decrease, they need to connect the lows; and if it shows an increase, then they connect the highs.
The second most common error is when traders identify divergence simply by connecting adjacent peaks of the indicator bars. But they do not monitor whether these peaks occur within the same trend. Another example of false divergence, when traders think that if in the indicator chart, there is an upward slope, and in the price chart, there is a downward slope; this is convergence. It is a mistake! Many traders also make a mistake when they analyze the divergence of the price highs and the indicator lows.
If you discover a divergence, make sure that the indicator highs and the price high occur at the same time. You should not analyze the price extremes that occur at different times! Divergence, being an early indication, features quite many false signals.
It is a big mistake to trade only according to divergences! Do not consider the divergence that has been followed by the price moves. They must have worked out, being false ones. Another common mistake is thinking that divergence is only a reversal signal.
Depending on the divergence type, it may signal both a trend reversal and continuation. If you have been reading this article from the beginning, you can already discover the divergence signal. Open your trading terminal right now and try to find divergences yourself.
What type of divergence have you found? What does it indicate? Then, go back to the list of mistakes and make sure you avoid them. The practice is the best way to remember theory. Well, we have studied the theory. Now let see practical trading divergence signals in different financial markets. A regular bearish divergence forms at an expected end of a trend. Traders often describe such situations as the trend is exhausting.
The above chart displays a bearish divergence. It is marked with blue lines. So, you see that the trend should reverse soon, but we should have a confirming signal. To define the entry point, we shall use the signal when the trendline dark-green line is broken. When the reversal bar closes below the trend, we enter a short trade. I marked the entry point with blue. We set a stop-loss a little higher than the next local high red line.
To fix the profit, we shall use a take-profit that is twice as big as the stop loss green line. The price goes down, and we take the profit. Regular bullish divergence is a perfect reversal signal. Just like with the bearish divergence, we should use the trendline breakout as an entry signal.
The above chart displays a perfect bullish divergence signal. The price is in the bear trend. Sometime later, there are two consecutive regular bearish divergences. I marked them with different colors. I will explain this phenomenon later. Now, we should just take this fact into account. Now, we just consider it just like a strong reversal signal. When you use trendline to detail entry points, you should be able to draw it correctly. The downward trendline starts from the first trend high to the last local highest high in our example.
In the previous example, with the bullish trend, the approach was the same, but the trendline was drawn across the lows. Let us go back to our example. After the first bar closes above the trendline, we enter a long. I marked it with the blue horizontal level on the chart. Like in the previous example, we set a stop loss a little lower than the last local low.
The take profit is twice as big as the stop loss. I should note that taking a profit that is twice as long as the stop loss is not always efficient. In our case, we have to wait for a profitable trade for a month. You can exit the trade based on the combination of the divergence signal with other indicators and trading strategies. I will deal with this in detail a little later.
Unlike the previous two divergence types, this signal means the trend continuation. You can use extended bearish divergence to enter in the trend, following a failed reversal. The above chart displays a common case of extended divergence. There is extended bearish divergence, where the indicator hits higher highs while the price highs are getting lower marked with blue lines.
This signal should be followed by a false trend reversal. To determine the entry point, we use the moving averages MACD, namely their breaking the zero level downside. Usually, when the MACD moving averages go into the positive zone, it is seen as a trend reversal signal. However, taking into account hidden bearish divergence, we expect a false breakout of this level.
So, when the indicator goes back into the negative zone, we enter a short trade. A stop loss is set a little higher than the first high of the convergence formed red line. It is clear from the above chart that the take profit, which is two times more than the stop loss, is hit by the price and exits our trade with the profit. This signal mirrors the previous one. It also suggests the trend, this time uptrend, will continue.
It is clear from the above chart that the MACD histogram forms lower lows, while the price chart indicates the uptrend. I marked the extended bullish divergence with the blue lines. Like in the previous case, we expect a false reversal of the trend. The MACD moving average do not confuse with the signal line! This is a buy signal! I marked it with the blue level on the currency pair price chart. We set the stop loss like in the case with the previous trade; only it is below the price low.
The target, double distance of the stop loss, is reached quite soon. It is quite a common situation in trading divergence signals. Let explore the third point in more detail. To filter out false signals, you can use supplementary technical tools, price action patterns, graphic chart patterns. Let us study how to filter false signals using Bollinger bands. The above figure shows an example of a false divergence between the price chart and the MACD histogram.
Following the divergence signal, the price starts moving down, and even the MACD moving averages foes into the negative zone. However, the price fails to consolidate below Bollinger bands, which means the price is likely to be consolidating rather than trending. The Bollinger bands get close in the zone of the red circle, where the price goes into the opposite zone. It cancels the bearish reversal signal. I explained how to set up the Bollinger bands indicator and trade with it on Forex in the article.
To filter false signals, you can use other trend indicators. Any additional signals delivered by trend indicators are stronger than the divergence signals. So, having learned the theory and the practical application of divergence, we can make up a step-by-step guide to trading divergence in forex. This is a basic strategy you can base on in trading forex. It could be quite a good guide for newbies. Try yourself in trading divergence. Enter the terminal without even registration in a couple of clicks, spot the divergence, and build your trading strategy.
Regardless of which trading method you use, you should always apply stop loss and take profit. At the right time, only these two tools will save your deposit and help you fix your profit. If trade divergence signals, you set a stop loss above the highest high for a bearish trend and below the lowest low for a bullish trend.
The above figure displays an example of a reasonable stop loss, marked with the red line. It is a bearish divergence, so the stop loss is set a little higher than the local high. In the case of the inverse divergence, you set a stop loss beyond the local price extreme that is within the divergence pattern.
Trading divergence suggests following the trend. So, you can exit the trade according to any reversal signal. I recommend beginner traders to set the take profit at a distance twice as long as that of the stop loss; this is a simple and winning trading strategy. Traders most often use oscillators divergence in trading. They are user-friendly and simple but provide quite accurate trading signals. You can learn more about stochastic oscillator trading forex in the article Stochastic Oscillator: guide for using indicator in Forex trading.
Each forex divergence indicator offered above is unique and has its own features and accuracy degree suitable for particular financial markets. Divergence principles will work with any technical indicator. So, you can use any oscillator that suits you best.
MACD stands for moving averages convergence divergence. The MACD indicator is composed of three elements:. To find out the divergence, you can use the histogram, as I described above. Or you can use the primary MACD line. I will explain the second way below. Diagonal lines in the chart above highlight the MACD bullish divergence.
Note that we shall define bullish and bearish divergence MACD according to extreme points of the MACD line blue line in the chart , not the signal line. I marked the entry point with a blue level. The RSI indicator relative strength index identifies the overbought or oversold zones, themselves as entry and exit signals. Another strong trading signal is the RSI divergence indicator. Like in the previous examples, there can be bearish and bullish divergence RSI.
Blue lines mark the divergence between price highs and RSI highs. So, there is a bearish divergence RSI. I enter a trade when the RSI line goes outside the overbought zone blue horizontal line in the chart. I exit a trade when the RSI oversold signal is sent. I marked the point with the green circle in the chart above. Stochastic is another popular oscillator used in divergence trading.
It is composed of two lines that often interact with each other. Like the RSI, a stochastic divergence indicator finds out the overbought or oversold state of the market. Stochastic forex trading strategy divergence suggests spotting convergences and divergences between the price bars and the main indicator line.
Blue diagonal lines mark a regular bearish divergence. An additional entry signal is delivered when the indicator line goes outside the overbought zone. The entry level is marked with the blue horizontal line. This signal is marked with the green circle in the above chart. The above chart shows an example of the bullish divergence stochastic. You see that the same rules work as for the MACD. The second low of the indicator is lower than the first one in an uptrend.
I enter a trade when the confirming green bar closes immediately after the intersection of the stochastics at the second top. I set a stop loss below the lowest low in the divergence. I take profit according to the stochastic rules at the second retest of the overbought zone. You can also exit the buy trade when the price breaks through the trendline or just set a take profit at a distance twice as long as that of the stop loss.
The stochastic oscillator is a very useful tool for technical analysis. A detailed guide to stochastic trading is in the article devoted to the Stochastic Oscillator. Unlike the oscillators covered above, the Awesome Oscillator divergence indicator looks like a histogram, not like a curved line. Next, the sell trade is exited with a profit, and a purchase is entered after the regular bullish divergence appears.
The entry levels for both a short and a long are marked with a blue horizontal line. At the entry points, the Awesome Oscillator breaks through the zero line. I marked the entries with green circles. An important feature of the AO is that the signal is sent when the indicator crosses the zero level.
When the AO breaks through the zero line, the local or the global trend should reverse. So, when the price extremes are separated by such crossing cannot be with the same signal pattern. To avoid such an error, you should check the same divergence on a longer timeframe. If the signal is not broken there, you can use it in trading. I have already mentioned that the Bollinger bands are well combined with the divergence signal. Bollinger Bands is a trend indicator, so we need an oscillator to define a divergence.
I will take the MACD as an example. If you are not yet familiar with the Bollinger Bands indicator, I strongly advise you to read the article Bollinger Bands Indicator. I described the double Bollinger band trading strategy. In short, it suggests attaching two Bollinger Bands indicators to the price chart.
One indicator is with coefficient 1; another is with coefficient 2. Finally, the chart is divided into three zones, where the central green band is a neutral area, and the red bands upside and downside are the buyer and the seller zones. The common strategy of double Bollinger Band divergence suggests that if a reversal followed the upward trend and the price entered the bottom red band, there should start a bear trend.
In the opposite situation, when the price enters the top red band, there should start a bullish trend. It is clear from the above chart that the strategy also delivers false signals. So, divergences here are a good filter. However, the MACD paints lower highs. This is an example of regular divergence.
If you discover such as signal moving average convergence divergence macd, the trend must soon reverse. We enter a trend earlier when the candlestick closes in the green zone and the MACD moving averages while the histogram goes into the negative area. We put a stop loss a little higher than the most recent local high. We should exit the trade when there is an opposite divergence signal of the trend reversal. It is clear from the chart that the signal is delivered in January.
We exit the short trade and enter a long one. A lot of literature is devoted to the study of the issue. Try analyze divergence patterns on the chart yourself to gain the necessary experience to trade and earn on signals. Determine for yourself an understandable and convenient indicator for analyzing divergence. It is important to remember that like any other signal or technical analysis model, Forex divergence and convergence is not an accurate reversal pattern.
In specific market conditions - a small timeframe or the release of important economic events, signals can become false. Experienced traders are advised to use auxiliary tools for a thorough analysis of the resulting divergence signal. This will help to identify possible false signs and minimize the closing of a position by stop loss. Robot for trading with Autocrypto-Bot crypto currency.
Robot Binary Options - Binary Robot. Automatic binary robot - Binary Options Robot Abi. Home signals Forex convergence and divergence. What is the difference and how to apply? A reliable broker, online signals and a robot! Forex convergence and divergence. Forex divergence and convergence Both signals are opposite to each other.
Convergence in Forex and its significance Convergence is the convergence of the price, that is, the price chart will move towards the indicator chart. Features of working with a convergence signal Convergence is considered a bullish signal or bullish divergence variant that occurs on a falling price chart. How to use convergence for trading: the appearance of a convergence signal does not guarantee a trend change, sometimes it signals us about the transition of the trend to flat, in such situations we say that the signal shows a slowdown in the current trend; for the formation of a pattern, the appearance of two tops on the chart is not necessary, a signal of the origin of convergence can be formed on a chart with three tops; to confirm the formed convergence, we can use popular technical analysis reversal patterns head and shoulders, for example.
Double confirmation of the emerging convergence signal gives more confidence in the signal strength and the planned trend change. The main rules for entering a convergence trade: the signal must be strong, that is, the angle of divergence between the price of the chart and the indicator, the more the better the indicator value is above the 0 mark when working with the MACD histogram; the trend line breaks through and the price is fixed below it; the reversal occurs at a strong support level.
Divergence in Forex According to the previously mentioned Alexander Elder, divergence is one of the strongest trading signals. Let's define divergence signals The emergence of divergence can be signaled by certain market conditions and specific price behavior.
First, we determine the current trend, as shown in the picture - it is upward. Depending on the direction of price movement, we define the minimums or maximums. In our case, these are the maximums. Further, on the chart, we select 2 maximums or 3 as it turned out in the picture , at the top points of which we draw a trend line, it gives a signal about the origin of divergence.
Then the indicator is superimposed on the chart. We also connect the maximum points of the histogram with a trend line. We try to make them coincide in time with the marked lines on the price chart. After drawing the lines, it is obvious that a price divergence has occurred, which indicates a possible reversal. It is necessary to determine the point of entry into the market.
The best option for opening a deal at the first formed candlestick, which was lower than the previous one. A divergence formed on it. The exit from the trade is at the level where the first candlestick formed, which closed with a price higher than the previous candlestick.
This signals a possible slowdown and trend change. Stop-loss is set slightly above the high of the price at which the divergence signal appeared. Features of working with an oscillator signal When determining a possible divergence or convergence, it is imperative to use an indicator. For a simpler perception, the histogram is made in two colors, green and red, where the first color indicates growth, and the second option is a price reduction.
In the picture above, I have used the AO indicator. It showed an entry point after the formation of a low, a pullback in price and the next formation of a low. Which coincided with a new high on the price chart, followed by a trend reversal on the next candlestick.
The strongest signal for a reversal after the formation of a divergence is considered when the histogram has formed not one top, but two. The price formed one maximum, rolled back a little, then a second maximum appeared. This phenomenon is called divergence accumulation.
I will write about him a little later. The more the slope or divergence of the graphs is formed, the stronger the potential for working out the divergence becomes. Divergence accumulation peculiarity and significance Every practicing trader has faced the cumulative feature of the signal. Situations where divergence and convergence forex can give false signals Throughout the history of the formation and development of technical analysis, traders have analyzed and displayed a large number of signals, graphical figures, patterns, the appearance of which on the price chart signals a possible trend reversal or the onset of sideways movement.
Divergence also has features that should be taken into account when a signal appears on charts: Often the emergence of divergence, which is then not worked out, is associated with the desire of the market to take a break. This occurs on the eve of the release of important political or economic news.
Therefore, experts advise using a signal only during periods of absence of strong negative or positive events in the market. Analysts note that divergence is pointless on small timeframes - 5-minute or minute. The older the timeframe on which the signal originated, the stronger the potential for working out. What are the H1, H4 and higher charts used for. It is better to analyze divergence using additional methods, look at the general market situation, volumes, and use additional methods of technical analysis.
For example, use reversal chart patterns - head and shoulders or double or triple bottom. Additionally, analyze the candlestick chart to identify candlestick combinations of reversal or trend continuation. Varieties of divergence and convergence Depending on what continuation the signal will have on the chart, the conditional divergence is divided into three types: Classic divergence.
It is a signal for a possible trend reversal and, depending on the type of direction of movement of the charts convergence or divergence , it helps to open a short sell position or a buy trade of an antik. Highs on the price chart and indicator are formed in opposite directions. When it is formed, each higher maximum of the price chart corresponds to the minimum of the indicator. And vice versa. Such divergence signals the continuation of the current trend. With such a divergence, the maximum points of the price chart are located approximately at the same level, and the extreme points do not appear on the indicator.
Divergence signals as a strong tool for entering the market Divergence signals are recognized by traders all over the world. The main advantages of divergence models: can be used on any timeframe, confirming the received signal by the presence of divergence on a higher time interval; you can trade using divergence signals both in the direction of the trend and against the main price movement; regardless of which pattern is formed - hidden, classical or weak, they show a strong signal.
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By using convergence and divergence indicators, traders may effectively reveal higher and lower momentum, and therefore the possible trend. Divergence occurs when the price of an asset and an indicator move away from each other. Convergence happens when the price of an asset and an indicator move. Welcome back to Forex professional training in financial markets. In this session Divergence and Convergence will be studied thoroughly. Divergence and.