This article shares my personal views on divergence, which may differ slightly from the theory you read elsewhere.
I define divergence: It is an early sign of weakening of market momentum, by technical indicators. Or to put it more simply, it is an early sign of a possible trend reversal.
Thus, we understand that the trend is the wave above the water, and the divergence is the wave below, going in the opposite direction.
Here are 3 cases of divergence signaling a reversal from uptrend to downtrend:
1. Price makes new higher highs, and the technical indicator makes new lower highs.
2. Price makes new higher highs, and the technical indicator makes new equal highs.
3. Price makes new equal highs, and the technical indicator makes new lower highs.
Similarly, there are 3 cases of divergence signaling a reversal from downtrend to uptrend:
4. Price makes new lower lows, and the technical indicator makes new higher lows.
5. Price makes new lower lows, and technical indicators make new equal lows.
6. Price makes new equal lows, and technical indicators make new higher lows.
In addition, there are other variations of Divergence, which when you use it for a long time, you will recognize them all.
Divergence can be used effectively in any market and any product, as long as there is a price chart. It is most used in Forex, Gold, Stock markets,...
Next, is an illustration of 6 cases of divergence, by the MACD technical indicator (default parameter 12,26,9), through the chart of currency pairs in forex:
1. Case 1:
2. Case 2:
3. Case 3:
4. Case 4:
5. Case 5:
6. Case 6:
Through the above example, you can see that the Divergence is quite accurate, the remaining problem is that you will have to filter the signals of the divergence, to eliminate false cases (a small percentage), through real trading. economy and long-term experience.
Read more: How to use metatrader4
Some notes when using divergence in Forex trading:
- You can use technical indicator that suits you, for example MACD, RSI, CCI, STOCHASTIC OSCILLATOR,...
- Incorporating multi-timeframe analysis.
- Combined volume analysis.
- If divergence occurs at resistance or support, the reliability will be higher.
- Can apply divergence to exit (take profit).
- Divergence still has false cases, but the rate is low, so it needs to be experienced in practice, using long enough time to gradually improve the effectiveness.
Good luck with the divergence signal. If you find the article useful, please share it, thank you.
Best regards,
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