Divergence forex system has been around for a while now and it has continued to give traders more confidence with every passing day. Generally, the system shows when price action is different from that of the indicators being used. It can be of two forms; bullish (where the price of a security is going down and at the same time the indicator is signaling weakness in downtrend) and bearish (where the price of the pair is getting higher while the technical indicator being used is showing weakness of the uptrend). The whole idea is for the trader to spot a reversal on time, which can be likened to decreased momentum that is not yet reflected in the price of the commodity traded.
INDICATORS USED IN FOREX DIVERGENCE
Like has been stated earlier, divergence is spotted by comparing price to an oscillator/indicator. The most commonly used oscillators for this system are
- WILLIAN %R
Taking it one at a time is a great way to really understand how these indicators work for the divergence forex system. For the purpose of this article, let us focus on the RSI oscillator
TRADING DIVERGENCE WITH THE RSI OSCILLATOR
Before we go ahead with what it is like to trade divergence with the RSI oscillator, let us take a look at what the RSI oscillator is all about. RSI stands for the tern Relative Strength Index; a momentum oscillator developed by J. Welles Wilder. The measurement can be done between 0 and 100. When it reads more than 70, the commodity I check is considered overbought; while when it reads below 30, it is considered oversold. It can be used in a lot of ways to trade the forex market, one of which is the divergence forex system.
The two main classes of divergence are
- BEARISH/BULLISH DIVERGENCE:
On the charts using RSI, a bearish divergence will usually show that price is making a higher high while the RSI is making a lower high. The bullish divergence on the other hand will show price making a lower low on the charts, while the RSI makes a higher low.
- HIDDEN BEARISH/BULLISH DIVERGENCE:
As the price makes a lover high in the hidden bearish divergence, the RSI makes a higher high. It occurs mostly in a down trend and signal continuation. The hidden bullish divergence shows on its chart a price making a higher low while the oscillator makes a lower low.
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