Using divergences to predict price action is an advanced trading technique, but the bottom line is that these are used to identify continuations or reversals in trends. In particular, divergence traders watch the lows and highs of price along with the lows and highs of the oscillator they are using. Below are four kinds of divergences in forex.
The first kind is called the regular bullish divergence, often used to identify a reversal in the ongoing downtrend. This happens because price is making lower lows but the oscillator is making higher lows, indicating that buyers have gathered enough energy to push the pair above its current selloff.
Second is the regular bearish divergence. Opposite to the regular bullish divergence, this signals that a downtrend is about to take place. This reversal signal happens when the currency pair makes higher highs but the oscillator shows lower highs, indicating a possible downtrend.
The third kind is the hidden bullish divergence. This happens when price makes higher lows but the oscillator makes lower lows, and is useful in predicting a continuation. This is because price makes higher lows during an uptrend and the formation of lower lows by stochastic means that buyers have enough energy to take the pair much higher.
The fourth kind is the hidden bearish divergence. This takes place when price makes lower highs but the oscillator sketches higher highs. This also predicts a continuation since price makes lower highs during a downtrend but the creation of higher highs by stochastic means that sellers have more momentum to push the pair down.
There are some conventions when identifying divergences but this depends on how strict you are with price signals. Highs in the oscillator are typically marked as the peaks but stricter traders want the oscillator to be above 80 to be considered a high. On the other hand, lows are marked as troughs but stricter traders want it to be below 20 to be considered a low.
The first kind is called the regular bullish divergence, often used to identify a reversal in the ongoing downtrend. This happens because price is making lower lows but the oscillator is making higher lows, indicating that buyers have gathered enough energy to push the pair above its current selloff.
Second is the regular bearish divergence. Opposite to the regular bullish divergence, this signals that a downtrend is about to take place. This reversal signal happens when the currency pair makes higher highs but the oscillator shows lower highs, indicating a possible downtrend.
The third kind is the hidden bullish divergence. This happens when price makes higher lows but the oscillator makes lower lows, and is useful in predicting a continuation. This is because price makes higher lows during an uptrend and the formation of lower lows by stochastic means that buyers have enough energy to take the pair much higher.
The fourth kind is the hidden bearish divergence. This takes place when price makes lower highs but the oscillator sketches higher highs. This also predicts a continuation since price makes lower highs during a downtrend but the creation of higher highs by stochastic means that sellers have more momentum to push the pair down.
There are some conventions when identifying divergences but this depends on how strict you are with price signals. Highs in the oscillator are typically marked as the peaks but stricter traders want the oscillator to be above 80 to be considered a high. On the other hand, lows are marked as troughs but stricter traders want it to be below 20 to be considered a low.
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