Forex traders spend much of their time in identifying trend strength. Trend followers consider taking note of the price swings and oscillations. It is important to note that not always does prices behave normally. Sometimes adverse economic variables become instrumental in affecting price movements. When there is a difference between the price level and oscillator readings, experts call it a divergence. Divergence Forex indicator takes this information into account and includes indicator’s failure to cope up with price direction.
Sometimes this may call for potential reversal. When prices fall beyond a particular limit without following the direction of the trend, it indicates a potential reversal from the bearish trend. Similarly, if there is a lower high position inside an uptrend, it indicates a disruption from normal movements.
This article throws light on 5 rules for trading with Divergence Forex indicator:
1. Drawing successive tops and bottoms:
Traders should keep in mind that in order to trade with divergences, price structure should take one of the following forms. The highest high position should be higher than previous high; same goes for lowest low.
There should at least 2 tops or 2 bottoms in order to make the divergence count. Additionally, the highs and lows should be successive and should not miss out any. Put simply there should be no clutters in between.
2. Special attention to price movements:
One of the most important points on which Divergence Forex indicator hold is the direction of trend line. Experts recommend checking the price action movement. In other words, there should be a divergence. To do that, compare the tops and bottoms using indicators like MACD or stochastic ones.
3. Attention to pips generated and linear movement:
Traders should focus their attention to the generation of more and pips from degeneration of trends from their price lines. In order to get a better picture, consider drawing straight lines between highs and lows both on price trends and indicators. The rule implies that the same line drawn for lows should be parallel to the previous line. This indicates that there is a chance of potential entry points.
4. Never miss a potential opportunity:
In order to get a better picture of Divergence Forex indicators, one should identify highs and lows on indicator which should be vertically reaching up to ones created from price actions. This indicates that divergence is stable and there might be a possible reversal at this point.
5. Attention to time frames:
To decrease possibility of false signals, consider trading on larger timeframes. This ensures that price and indicator divergence gets pictured and your trade structure is clean.
Although divergences do occur on shorter timeframes as well, traders consider not relying on them. Newbies should consider trading divergences with at least a one-hour chart diagram.
Trading with Divergence Forex indicator is definitely not an easy task. Often it gives rise to false signals, and potential zones for trading get disrupted. Make good use of indicator signals and understand which way prices are heading towards.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.