What Is Divergence Forex Trading
Divergence is all about lower lows and higher highs. It is a comparison between price and technical indicators. Divergence can also compare spread between the two symbols. Not only in the Forex Trading, but the Divergence can be used to increase the gains in any trading market. Divergence is considered as the leading indicator because it leads price. It is observed when the two symbols that you are comparing appear to move in opposite directions. Divergence can signal a trend continuation or a change expected in trend. The signals given by the Divergence Indicators are used to search the trading opportunities in the signal direction. Many indicators can be used to do Divergence trading such as Stochastic, Relative Strength Index (RSI) and Moving Average Convergence Divergence ( MACD ) etc.
Types of Divergence Forex Trading
Divergence is of two types that are the Regular Divergence and the Hidden Divergence. If Divergence can be observed in price but cannot be seen in the Oscillator then this type of Divergence is the Regular Divergence and if Divergence can be observed in the Oscillator but cannot be seen in the price then this type of Divergence is the Hidden Divergence. The traders and investors should use the Regular Divergence in combination with the Hidden Divergence because this combination will increase their winning chances. The winning percentage will depend on the trading style of the traders.
Why use the combination of both types of Divergences Forex Trading
In this combination, the traders should rely more on the Hidden Divergence because using the Hidden Divergence the traders and investors trade in the trend direction. On the other hand, the Hidden Divergence forms in the opposite side of the trend direction and attempts to reach a bottom. So in an attempt to reach a bottom, the indicator may fail and if the traders and investors open a position at this moment then their trades may go in loss. This is the reason why the traders and investors should use the Regular Divergence in combination with the Hidden Divergence so as to minimize the chances of their predictions going the wrong way.
When the traders should trade Divergence
Divergences that are observed on the longer time periods are more accurate than those observed on the shorter time periods because less false signals are given by the Divergences observed on the longer time periods. Profit potential will be huge but the number of trades will be less. The Forex traders and investors should not trade if they observed the Divergence on the chart but the price of the currency has already spend some time in moving in the opposite direction.
A comparison of Regular and Hidden Divergence is shown in the figure below.