Trading Divergences of Forex Indicators

As you being to build experience and trade forex more frequently, it is common to engage with more advanced methods of trading. Top forex traders seek to eliminate the risk of trading as much as possible. This is done through extensive types of analysis which can reveal some key information as to the direction of a particular market. One such indication is known as a divergence. Noting such an event will act as a clear sign to an experienced trader that they should take some action to alter their market position.

Identifying Divergences Correctly

At their very core, a divergence is a movement in the price action away from the movement as shown by a technical indicator. This indicator can be any you care to use in your technical market analysis. The important point is that when the indicator and the price action show conflicting signals, this is a divergence.

With forex trading practice, the aim is that traders can use such divergences to their advantage in reading the early trend of the market. Ultimately, this allows those who are experienced trading forex to adjust their position and increase their chances of success. Common indicators which are used in the identification of divergences are RSI, MACD, CCI, or Stochastic Oscillator, although virtually any technical indicator will work for the purpose. Your forex broker should facilitate trading through a platform such as Metatrader 4 where all of these indicators, and more, are readily available.

Examples of divergence could be when price action is showing a higher high or a lower low than your technical indicator. For experienced traders, with enough practice and time spent viewing various market trends, divergence can be quite easy to spot and help them in opening trade opportunities.

Types of Divergence in Forex

Typically, within this area of forex trading signals, there are two types of divergence. These types include regular divergences and hidden divergences. Forex trading for beginners can be a daunting proposition, however, it is vital to be as aware as possible of divergences from an early stage in your learning process.

Regular Divergences

A regular divergence may be either bullish or bearish and is seen as an indication of a trend reversal. A bullish divergence will be spotted during a downtrend where the price action may show lower lows, but your technical indicator of choice shows a higher low. In forex trading, this would suggest a possible shift in momentum towards an upward trend.

A bearish divergence, on the other hand, will occur during an upward trend where price action shows higher highs, but your indicator is showing lower highs. This may suggest that the current upward trend is weakening and a possible shift may be about to occur. Someone experienced in online trading of forex may take this opportunity to exit their position.

Hidden Divergences

Whilst a regular divergence signals the changing of a trend, hidden divergences point toward the continuation of a current trend. Again hidden divergences can be both bullish, and bearish in nature. A bullish hidden divergence occurs when price action shows a higher low, but your indicator shows a lower low.

Oppositely, a bearish hidden divergence occurs when price action shows a lower high, but the indicator displays a higher high. When this is noted during forex trading sessions, we can presume that the current trend will continue perhaps after a change.

How to Trade Divergences

When engaging in foreign currency trading, timing is always of key importance. This is particularly the case when trading divergences. The most important thing which you should do is try to establish some confirmation of a divergence. This means waiting at least until the current candle is closed. Following this, you should look for the indicator crossover with your price action chart. Again this is something which any online trading broker should cater for through their trading platform.

Once confident in your assertion of divergence, you need to set your strategy depending on the direction of the trend. In the case that is a bearish divergence, it makes sense to set a reasonable stop loss in the region of your noted divergence to mitigate any potential loss. Oppositely, in the case it is a bullish divergence, then you are free to try trading the breakout with your own trend-based strategy.

Conclusion

Forex currency trading can be a maze of complex information, however, when interpreted in the correct manner, particularly with the help of industry experts like TradeFW, it can become a great deal easier. Even the best forex traders engage in continual learning, and learning to trade divergences of indicators is an integral early step in this growth process.

TradeFW.com is a top quality and highly reputed broker in the industry. They provide a wide range of informative educational content to ensure maximum possible success for their forex traders and have provided this piece on identifying and trading divergences in forex.

■ Trading Divergences of Forex Indicators

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