Forex Academy traders often use such a concept as Forex convergence in webinars or training articles. It is important to understand what we are talking about. If you are faced with the task of learning how to trade profitably on Forex, then you need to distinguish between convergence and divergence, what they look like on the trading chart, and what to do if there is a convergence.
What is Forex convergence?
Convergence is a process when two sides converge, each of which has the same characteristics. In other words, Forex convergence is the exact opposite of divergence.
If there is a convergence on the Forex chart (for example, in a downtrend), and the indicator shows the opposite trend (uptrend). The trend lines of the indicator and the chart will seem to converge.
On the chart, Forex convergence looks like this:
Figure 1. The Convergence Of Forex.
For successful trading, a trader must be able to distinguish divergence from convergence. After all, the main goal of any Forex trader is to profitably enter the market and exit it on time, while getting some profit. The signals received from convergence and divergence are very accurate, and they are often used by traders during Forex technical analysis.
Almost every Forex indicator will follow the price of a particular currency pair. But the problem with the majority of indicators lies in the delay in issuing signals. However, there are also those that can go ahead of the price.
The best way to see the divergence is to install the following indicators in the trading terminal:
and any other Forex oscillators.
When the indicator and the price chart show different directions, then there is convergence and divergence.
Important: if there is a Forex convergence in the terminal, then you should prepare to open Forex buy orders.
Remember: if convergence involves the convergence of lines, then divergence is the opposite-the divergence of lines. These concepts should not be confused.
Forex convergence and divergence do not just appear on the chart. They appear only when the price and the indicator show different directions in relation to each other. For example, the price chart has reached another peak, but the indicator on the contrary shows a downward movement.
To understand how convergence differs from divergence, just look at figure 2.
types of Forex convergence
Figure 2. Convergence and divergence schematically.
The stronger this difference (the divergence of direction between the indicator and the price), the faster the trend can change or even reverse it.
How do I recognize convergence on a chart?
So, open the chart of any currency pair. Let it be the EUR/USD pair.
The timeframe for determining convergence is H4.
Let's add a MACD indicator with standard settings. It best shows convergence and divergence.
Then we look for the discrepancy between the Japanese candlesticks and the direction of the MACD indicator.
Draw vertical lines from the lows that the MACD indicator displays.
Figure 3. Forex Convergence to EUR / USD (example).
Next, draw trend lines that indicate convergence.
Figure 4. Forex Convergence on EUR / USD (example with trend lines).
Types of convergence
Don't know what types of Forex convergence exist? They come in two types: bullish and bearish.
When there is a bearish convergence of Forex in the market, you should expect the correction to be completed and be ready to meet the bearish trend.
On the chart it looks like this:
Figure 5. Bearish convergence.
It is quite simple to see bearish convergence: when the lower indicator, in our case, the MACD, shows the first low and the second high value, and the price on the chart has a lower peak, it means that there is an overbought and, most likely, the end of the correction movement.
At the breakout of the daily level, from which the correction began, you can safely sell. It is better to set Stop Loss at the maximum of the price pullback. Each trader chooses what goals to set. But you should pay attention to the pivot levels.
When a bullish Forex convergence occurs in the market, the chart shows the prevailing bullish trend in a corrective movement.
On the chart it looks like this:
Figure 6. Bullish convergence.
This type of Forex convergence is used with opposite conditions that are met for a bearish one. In an uptrend, the price should show higher lows, and the indicator will show a downward previous pullback. This indicates oversold during the observed pullback. If this happened in the market, you can consider the moments of entering the purchase.
It is better to set the Stop Loss order just below the minimum price pullback.
So, we have considered the concept of convergence, as well as learned the types of Forex convergence and what to expect from the market when this model occurs. In addition, we have learned to recognize them on the chart.
Convergence and divergence are quite a powerful signal on Forex. These models are worked out in 97% of cases. The optimal timeframe for using it is H4 and D1, since they are the least likely to cause market noise. Although some traders are not afraid to apply it on H1 and below.
Trades should be opened only when the MACD indicator shows a signal that will meet all the conditions that correspond to convergence or divergence. When there is a Forex convergence or divergence, some market participants will recognize this situation in it, which will bring them profit. It is correct to combine the signals received from the indicators with Price Action patterns, absorption figures, and pivot levels. Thus, the trader will save himself from the mistake of entering the market incorrectly.