Some Forex traders cite divergences as the only way out in technical analysis. Other Forex traders see divergence as an unusable model. Reality is something between these two mindsets. Continue reading this article to learn more about Forex Divergence Indicators.
The purpose of classical divergence is to show an imbalance between a price and an oscillator, assuming that this imbalance has the potential to change the price trend.
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In the following paragraphs, we will describe two trades due to several differences in the MACD histogram that appeared in the USD / JPY daily chart. The first trade had a dream result, but the second trade led to a loss.
Forex trading with the help of divergence
As shown in the daily dollar / yen chart shown in Figure 1, the two divergence signals are relatively close to each other, between the last months of 2006 and the beginning of 2007.
Trading stop
For the first signal (red), which occurred between November and December 2006, we have almost a textbook of classical ascending divergence. The price is drastically lower while the MACD histogram is much lower than excellent. Proponents of divergence trading believe that this type of price-oscillator imbalance predicts a change in the price trend. In this case, the price correction should be a reversal of the upward trend.
This is exactly what happened. As shown in the table above, prices rose in early December and did not change until the second divergence was completed. The first signal of divergence was so strong that even a small divergence occurred within itself, which came with the help of the main divergence to easily push the price up.
Transaction
The second divergence signal (seen in dark blue), which occurred between mid-December 2006 and mid-January 2007, was not entirely a textbook signal. While it is true that the contrast between the two peaks was very pronounced at the lowest level of the MACD histogram, the price action was not very high and was just an uptrend. In other words, the price of this second divergence did not have a definition that was almost as high at its peaks as the first referendum at clear intervals.
Whether or not this incompleteness in the signal results in less than a star that results immediately afterwards is difficult. Any foreign exchange trader who tried to follow this second vago signal for a short time became heavily involved in the following days and weeks.
However, traders exclusively patients who did not experience the last stopped losses were given a short-term opportunity near the top, which was almost as lucrative as the first differential trade. . The second divergence trade was not too much for Pip’s perspective. However, given this second difference, a very significant point undoubtedly means that it was a sign in the first differential trade.
Create a winning deal with divergence
So how do we maximize the potential profit of a divergent transaction while minimizing its risks? First of all, although divergence signals may work in all time frames, long-term charts (daily and higher) usually provide better signals.
When you find an opportunity to trade with divergences, immediately enter the trading position with a small trading volume. By doing this, if the right deal comes out of the water, you have entered at the best price, otherwise you will not have a great commitment to the wrong deal. Just concentrate so that the loss limit is not so small as to get out of the trade quickly, nor so large that the risk to the reversal of the trade becomes irrational.
On the other hand, if the trade is successful, you can add a step to the volume of the trade with your divergence, you can also get a very good profit.
The last word
We can easily say that the divergence signals of the oscillators have good credibility, at least in the Forex market. If you look at the recent history of the major Forex currency pairs, you can see that usually the big movements in the Forex market have originated from a divergence. This can give the trader a good incentive to trade divergently in Forex.
Testing the divergence transaction in the experimental environment
By downloading the divergence indicator and opening an account at one of the best Forex brokers, you can continue trading divergence in a trial environment with virtual money until you have the necessary confidence. If you have any questions or concerns, you can contact us.
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