How to Use Divergence to Get the Upper Hand

Today, forex traders utilize technical as well as fundamental tools to give them a better understanding on price action within the markets as well as business news and events.  From a technical point of view divergence is utilized and analyzed when the specified price of a particular asset travels in polar directions.  When working with divergence the forex trader should keep in mind that the price action can be either positive or negative.

In addition, the direction of divergence will provide the forex trader with a strong understanding of the direction of price action and how to take advantage of divergence signals.  Also, divergence usually takes place when there are swings in price from the swings of the momentum indicator.  There are several examples of momentum indicators and the best ones to focus on are RSI, MACD indicator and Stochastics.

The forex trader must keep in mind when utilizing divergence that there are two different divergence indicators.  The first type of divergence is positive and takes place during a time when the price of a certain asset reaches a new low while the same time the indicator proceeds to move upward.  Conversely, a negative divergence happens when the price action of an asset hits a new high and the indicator does not do the same and closes lower than that of the previous high.

When utilizing momentum and divergence the forex trader should be cognizant that there are concrete rules which should be followed.   One of the most important rules to focus on is that for a divergence to take place you need the following to exist; double top, double bottom, higher highs than the previous high and lower lows than the previous low.   The forex trader should also be aware of drawing lines from consecutive tops and bottoms are very important when utilizing and trading momentum and divergence.

One of the most important aspects of divergence is focusing on what divergent signals have told us about past price action movement.  Divergent signals are usually more accurate with a longer time frame.   This means that you typically get fewer false signals and if the trader learns how to structure their trades they can make a killing in the forex markets. It has been proven that when utilizing divergence on shorter time frames that these timeframes are less reliable.

There are several variations of divergence.  Some examples of different divergence are; regular divergence and hidden divergence. Regular divergence is a fantastic tool to figure out whether a trend is increasing or slowing down.  Hidden divergence typically compares price action higher lows in price with the price during an uptrend.  In addition, hidden divergence compares lower lows in the indicator and the lower highs of price in a downtrend.

In closing, forex traders today have a multitude of different options to leverage off of to capitalize on winning trades.   Technical analysis and divergence when utilized properly will help the forex trader complete winning trades on a consistent basis.