How to trade Divergences – full guide

The primary responsibility of a trader is to observe price fluctuations and then enter into a trade based on those findings. On occasion, a significant trend can be seen on the price chart, indicating that the situation is clear. However, there are times when the trend is weak or when the price consolidates. Searching for divergences is one technique to deal with them. Many people are unsure how to react in such situations. And this is the topic of today’s article.

What is the divergence in forex trading?

You’ll need to use oscillators, which are unique technical analysis indicators, to notice the divergence. On any binary options trading platform or metatrader platform, you have a few options to pick from. They’ll be slightly different. The essential rules, however, remain the same.

When it comes to determining the trend, a trader has a few options. One only needs to draw a trend line. And then can also analyze and develop conclusions from a variety of time frames. And you can as well utilize a moving average. It is possible for the trend to be strong or weak. We can use a convergence to figure out how strong it is.

When a certain oscillator and the price are both rising or decreasing, convergence occurs. During an uptrend, both the price and the oscillator may make a high, followed by another that is higher than the first. They can form a low and then another that is lower than the previous one during a decline.

During an uptrend, a divergence occurs when only the price hits a higher high while the oscillator produces a lower high. Similarly, during a downtrend, when the price hits a lower low but the oscillator creates a higher low. You can presume that the trend is deteriorating and that it will most likely reverse in the not-too-distant future.

divergence forex indicators

Different types of oscillators can be used to detect divergence. The Moving Average Convergence Divergence is one of them (MACD). Below is an example of a chart with the MACD. The price is decreasing, resulting in a lower low, but the MACD is rising, resulting in a higher low. It can be interpreted as an indication of a trend reversal.

divergence forex indicators
divergence forex indicators

The Stochastic Oscillator

Another type of oscillator you might use is the Stochastic Oscillator. A decline may be seen on the chart below. However, just the price is falling. The Stochastic is on the rise. The tendency will shortly reverse.

The Stochastic Oscillator
The Stochastic Oscillator

When to enter a trade when trading using divergences

Many traders believe that the signals obtained from divergences are insufficient. They suggest that until the trend truly reverses, the oscillator may display divergence for a long time. So the question is, when should you enter a trade?

Following candlestick patterns and using price action strategies will help you locate the finest entry points with divergences. You can, for example, look for a pin bar at the top of an uptrend or the bottom of a downtrend and enter the trade immediately after it.

When to enter a trade when trading using divergences
When to enter a trade when trading using divergences

The relative strength index to trade divergences

Another oscillator that can be useful in detecting divergence is the Relative Strength Index (RSI). Take a look at the graph below for more information. The divergence is visible on the RSI. Take a look at the price bars now. The pattern of a double top has emerged. It confirms that now is an excellent time to enter the trade.

The relative strength index to trade divergences
The relative strength index to trade divergences

Conclusion

The oscillators aid in the detection of a divergence. Divergence isn’t something that happens on a regular basis. It can be difficult to detect it at times. However, once it is obvious, you may expect the tendency to reverse quickly. Extra techniques, such as candlestick patterns recognition, can help you find the finest entry points.

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