Divergence compares price of the currency with technical indicators to arrive at useful results in form of signals. These signals generated by the Divergence Indicators may be of trend continuation or trend reversal. The concept of the Divergence can be used in any trading market to increase the gains. Stochastic, MACD and RSI are some important Divergence Indicators. The two types of Divergences are known to the traders and investors and these are the Regular Divergence and the Hidden Divergence. Regular Divergence is in the direction opposite to that of the trend direction and the Hidden Divergence is in the direction same as the trend direction.
The traders and investors should not rely only on one Divergence but should use a combination of both types of Divergences to increase their winning chances. The traders should not only rely on the Regular Divergence because the signals given by the Regular Divergence are not in the trend direction. Regular Divergence only predicts a possible reversal and lesser predictions are true so the Forex Trading with only Regular Divergence is more risky. The traders should also not rely only on the Hidden Divergence because sometimes the false signals may also be given by the Hidden Divergence so it is better to use Hidden Divergence in combination with the Regular Divergence.
Divergences of longer time periods are believed to be more accurate as compared to the Divergences of shorter time periods because divergences of short term periods may give more false signals and if the traders and investors follow the signals given by the Divergence Indicator of the short term periods then it is possible that they might be caught in a losing trade. The traders and investors should use the Divergence Indicators with caution and trade either in trend direction or if a strong reversal is predicted depending on any major market news.
No trader and investor have earned millions doing 20 or more trades a day and gaining profit in all the trades. So it is advisable to the traders and investors to trade less but trade wisely using the Divergence Indicators.
A comparison of Regular and Hidden Divergence is shown in the figure below.