In the trading world, there is fundamental analysis and technical analysis that traders use to help them make decisions. While fundamental analysis focuses on news and market sentiment, in technical analysis traders use many indicators to find out what will happen to future price movements. Trading indicators are used to provide an easy way to recognize patterns and make it easier to predict which direction the price will move.
Among the many trading methods used, there is one method that can provide a favorite trading signal among traders, the divergence method.
What is divergence?
A divergence or divergence is an early sign of market change that indicates when the market is losing power. When the market is moving in one direction, real market forces are preparing to reverse or reverse direction.
The price should move in the same direction and by the same amount on the chart and the indicator. If the price rises above the previous candle, the indicator should also rise.
In other words, when this signal appears, the trader can decide whether the trend will continue in the same direction or slow down and go in the opposite direction.
What is divergence in trading?
Basically, divergence trading is a trading method that uses the difference between price movement and oscillator indicator movement as a benchmark. Oscillator indicators that can be used such as MACD indicator, RSI indicator, Stochastic indicator and similar indicators.
Divergences are often used to find changes in price movement in a trend. It seems simple, but many traders have a hard time understanding divergence. Even if you are just starting out, you need to learn the basics of trading.
A divergence means that the current trend is slowing down and could turn around soon. Some investors use divergence to determine if a trend will continue. There are two types of him in the forex market: regular divergence and hidden divergence.
How to trade divergence?
As mentioned earlier, there are two commonly known types of divergence: positive divergence and hidden divergence. To start trading divergence steps in forex trading, you need to understand technical analysis to help you understand the steps to practice divergence in forex trading. To clarify the two types of divergence, consider the following explanations.
normal (classical) divergence
A classical or regular divergence is an indication that a price trend reversal is about to occur. So a regular bullish divergence and a regular bearish divergence. Learn more about how to trade classic divergence.
A bullish divergence often occurs when the indicator is at higher lows and the price on the chart is at lower lows. These signals indicate a trend reversal or reversal, i.e. a reversal (bullish) from a downtrend to an uptrend.
A normal bearish divergence occurs when the price is high on the chart and the indicator is low. These signals signal a trend reversal or reversal, i.e. an uptrend to a downtrend (bearish).
hidden differences
If there is a hidden divergence, it means the trend will continue. A hidden divergence can take the form of either a hidden bullish divergence or a hidden bearish divergence.
A bullish divergence is hidden when the indicator is below the low and the price is above the chart low. All things considered, the recent upward trend is likely to continue.
A hidden bearish divergence exists when the price is below the chart highs but the indicator is showing highs. These indicators suggest that the current bearish trend may continue.
What is MACD indicator?
The MACD (Moving Average Convergence Divergence) indicator is a very simple and easy to use trading indicator as it is very useful for traders. The MACD indicator is a useful indicator for determining overbought and oversold conditions by looking at the relationship between two moving average indicators, long and short.
According to Thomas Aspray in 1986, the difference between the MACD and the signal line is often calculated and presented in the form of histogram bars rather than in line form.
The MACD itself has three parts, two lines and a histogram. The three parts are:
- Signal line. usually red. Calculated from the 9-day EMA (Exponential Moving Average) indicator. Also, you can change the period of the signal line.
- MACD line. This line is calculated from the decline of the 26-day and 12-day EMAs (12-EMA – 26 EMA).Duration can be changed upon request
- MACD Histogram. This MACD histogram bar chart is calculated by subtracting the value of the MACD line from the signal line (MACD line – signal line).
From the above description, MACD is written as MACD (12,26,9). A standard period proposed by Gerald Appel in the 1960s was to use periods of 12 and 26 days.
In this case, reading the MACD Divergence indicator is not much different from a common divergence strategy. If the price is trending upwards (forming higher highs) but the MACD area actually decreases (forming lower highs), the uptrend will quickly reverse. This is because the price increase is not supported by the strengthening momentum.
On the other hand, if the downtrend is in a downtrend, it can reverse to an uptrend if the MACD area in the negative zone actually increases (forms a higher low). This state of affairs shows that the bullish momentum continues to build, although sellers still have power.Eventually the downtrend in price turns into an uptrend when the MACD area actually enters the positive zone
The MACD indicator also has the following features and uses:
- Identify price trends
- Know trend reversals and detect momentum
- Identify overbought and oversold
What is the RSI indicator?
The RSI (Relative Strength Index) indicator is a type of technical indicator that looks at how much the price has changed over a period of time in order to understand whether the market is oversold or overbought (overbought). The RSI indicator is primarily used to know when an investment asset is oversold or overbought, but it can also be used to spot new trading opportunities. is a type of technical indicator known as .
Generally, RSI is used like any other indicator to look for buy/sell signals. When the RSI enters overbought territory, it is a sell signal. If the RSI enters the oversold area, it is a buy signal.
A sell signal is confirmed when the RSI is overbought and breaks below 70. If the RSI rises from the oversold territory and rises above 30, this is a sign to buy.
RSI can also be used to show when prices diverge from each other. Divergence occurs when the RSI line does not move “in line” with market price movements. If the price is trending up but the RSI line is trending down, the future is bearish.
Conversely, if the price is trending down but the RSI line is not going down, as in the example above, it is going up (bullish) in the future.
If you want to learn more about how to use Divergence, or if you didn’t understand the divergence explanation this time, don’t worry. FBS analysts are ready to give you the best advice and education. Join FBS’s large family of forex brokers known for providing excellent service all over the world and talk to analysts about anything related to investing and trading.