Forex Divergence trading is both a concept and a trading strategy that is found in almost all markets. It is an age old concept that was developed by Charles Dow and mentioned in his Dow Tenets. Dow noticed that when the Dow Jones Industrials made new highs, the Dow Transportation Index tends to make new highs as well and when the Industrials index made new lows, the transportation index would also follow suit. This is because when industrial production is high, transportation is used more to ship the goods. During times of recession or slowdown, when production dropped, the transportation would also drop. The most important of all is when Dow found out that when there was a divergence between the two, it presented a possible change in the markets. For example, when the Dow Industrials made new highs and when the transportation index failed to make a high it indicated that there was some discrepancy. This formed the basis of divergence theory which was soon developed into a trading system on its own. So, in the context of the forex markets, when price makes a new high, the oscillator also should make a new high. Or when prices make a new low, the oscillator should ideally make a new low. When there is a discrepancy between price and the forex a divergence is identified. To spot the divergences in the forex markets, it is usually done comparing price to an oscillator. The most commonly used oscillators include:. For the sake of clarity, in this article we will explain the concept of divergence trading using the RSI 14 Indicator. Divergence trade setups can be forex in any time frames and are classified into two main types. Divergence table below gives a brief summary of summary of various divergences and what they represent. The charts below show how each of the divergences can be traded:. The bearish divergence is show in the above chart with price making a forex high but RSI making a lower high. A sell position at the small resistance prior to the high with stops at the recent high targeting the low formed during the divergence shows a high probability trade potential. The bullish divergence chart above shows price making a lower low while the RSI makes a higher low. A long divergence can be entered at the top of the bounce after the second low is made with stops at or below the second low with target to the high formed during the divergence. The above chart shows a hidden bearish divergence as price makes a lower high and RSI makes a higher high. The hidden bearish divergence occurs in a downtrend and signals continuation. Therefore, short positions can be taken on the low formed divergence the divergence to trade in the direction of the trend. The chart above shows a hidden bullish divergence. Price makes a higher low, while the oscillator makes a lower low. Divergence trading is easy and can be traded on any time frame. It can be used with MACD, RSI or any forex oscillator for that matter. For best analysis in divergence trading, it is advised to make use of the line chart, especially when using the RSI and it is easier to spot the divergences. Candlesticks or bar charts are not ideal chart types to use with divergence trading due to the wicks. The lines chart represent closing prices, which is what RSI or any other oscillator tracks. Therefore line charts are better to identify divergence trading opportunities. In most cases, prices will continue to make another attempt to make a low or a high, which is usually done by the market to hunt for any stops placed by early traders who want to get more pips from their divergence trades. Improve Your Trading Skills - Don't miss our forex posts! Trading Forex, Binary Options - high level of risk. Please remember these are volatile instruments and there is a high risk of losing your initial investment on each individual transaction. Home Forex Brokers Binary Options Brokers Trading Software Forex VPS Signals Analysis Other Tools Forex Education Forex Strategies BinaryOptions Education Binary Options Bonuses Binary Options Strategies Articles Humor ProfitF Write For Us Advertising Contacts. Indicators to use for Divergence Trading To spot the divergences in the forex markets, it is usually done comparing price to an oscillator. The most commonly used oscillators include: Regular Divergence Hidden Divergence The table below gives a brief summary of summary of various divergences divergence what they represent. Divergence Price Oscillator Signal Bearish Divergence Higher High Lower High Sell Bullish Divergence Lower Low Higher Low Buy Hidden Bearish Divergence Lower High Higher High Sell Hidden Bullish Divergence Divergence Low Lower Low Buy The charts below show how each of the divergences can be traded: Divergence Trading — Some important points Divergence trading is easy and can be traded on any time frame. Trading with Renko Charts. Forex Brokers Reviews Binary Options Brokers Reviews Trading Software Forex VPS Trading Signals. Newest Forex EA, Systems. UltimateProfitSolution Forex Libra Code Binary signals indicator FXOxygen EA FastFXProfit System.
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