Making technical analysis, it is interesting for any trader to see in advance where the price of a particular currency pair or other asset will move. After all, it depends on whether he will get a profit on Forex or not. To make a profit, it is important to see the Forex divergence on any timeframe.
In fact, divergence and convergence of Forex is considered to be one concept-divergence. Convergence is observed in bullish divergence.
In this article, we will understand the concept of divergence( divergence), consider the types of Forex divergences with examples, and learn how to determine divergence during technical analysis on Forex.
Divergence or divergence demonstrates the market's willingness to go in the opposite direction. In other words, a divergence should be considered when the direction of price movement does not coincide with the direction of movement of the Forex indicator. Moreover, this can be observed both in the direction of the trend line and against it. It is better, of course, for divergence to occur in the direction of the global trend. Forex divergence works well on the H1 and H4 timeframes. This is why it is important to see this turning point in order to use it for profit.
Types of divergences on Forex
It should be borne in mind that there may be different examples of divergence in Forex.
Normal or classic divergence.
The hidden divergence.
To enter the market more accurately, you need to be able to see and distinguish the types of Forex divergences on different timeframes.
Let's look at each view separately.
Normal or divergence in the classic form of execution allows you to see a trend reversal. This is a good signal for a short sell or a long buy.
If the divergence is bearish, then the price chart will prepare for a downward movement, and the Forex trader should prepare for sales.
When there is a bullish divergence, you should prepare for purchases, as the chart will go up.
By the way, examples of divergence in Forex can be different, the main thing is to correctly determine its type using an oscillator.
Bearish divergence: how can I see it on the chart?
To determine a bearish divergence in the market, a trader should look at the maximum price values (Forex candle shadows), as well as the corresponding indicator. The classic bearish divergence will be observed when certain conditions are met: a high maximum should appear on the price chart, and the indicator should show a lower maximum.
However, it is not necessary to observe higher maximum price values on the chart. It is enough that the previous vertex is slightly lower than the next one.
Visually it looks like this:
Figure 1. Bearish divergence on the chart.
Normal bullish divergence
To determine the classic bullish divergence of Forex, you should pay attention to the minimums of the chart, as well as the indicator. If the market has the usual bullish divergence, then the Japanese candlesticks will draw a lower price value, and the indicator on the contrary-a higher minimum. In this case, you should expect an upward movement, that is, the trader needs to prepare for purchases.
Visually it looks like this:
types of Forex divergences
In Forex, there may be not only the usual classic divergence, but also a hidden Forex divergence. It reports a continuation of the trend. However, it is quite difficult to recognize it in the trading terminal. Hidden Forex divergence gives a clear signal to open a buy or sell position.
Hidden divergence can occur:
If there is a hidden bearish divergence in the market, then you can prepare for the price chart to continue its downward movement.
When there is a hidden bullish divergence on the chart, then the price will rise.
Hidden divergence (bearish)
how to determine divergence in Forex.
To see the hidden bearish divergence of Forex, you need to determine the peaks of candlesticks or highs of the price, as well as the indicator. You can use the MACD indicator to detect hidden divergence. Such a picture emerges only in cases when the price moved down. If the indicator shows divergence at this moment, then we can expect a downward movement in the future.
Hidden divergence (bullish)
divergence in Forex technical analysis
To identify the hidden bullish divergence, you need to pay attention to the lows of the chart, as well as the indicator. This type of divergence occurs when the market is directed upwards, draws high lows, and the indicator readings are lower.
Sometimes hidden Forex divergence is compared to a slingshot. The indicator of a particular oscillator acts as a slingshot. Thus, after a certain correction, the price is “catapulted”, that is, its further movement in the original direction.
The extended Forex divergence is somewhat similar to the usual classical divergence. But in the case of extended divergence, the price forms a figure that closely resembles a “double bottom” or “double top”.
With graphical figures, everything is clear, but how to determine the direction of the market if the indicators draw a second minimum or maximum, which are very different from the minimum or maximum prices in the terminal? If this feature is observed, it means that the price will continue to go in the same direction.
There are two types of extended divergence:
It is important to note that extended Forex divergence is one of the varieties of trend divergence in its classical sense. It can be observed when the market intends to slow down, but instead of changing its direction, it continues its movement in the same direction as it was before.
Bearish extended divergence
examples of divergence in Forex
If there is an extended bearish divergence on the chart, this can only mean that prices will continue to go down, so you need to look for an opportunity to sell.
To determine the extended bearish divergence, the trader should pay attention to the peaks (highs) of not only the chart, but also the indicator. Usually this type of divergence is observed along the vertices during a large movement. The market draws a double peak, but the second peak of the price may be slightly higher or lower than the previous value. Even if the vertex levels are the same, the lower indicator will show a lower second maximum. The indicator will not draw a double vertex that is observed on the price chart.
You can solve this problem in a different way. You don't have to think about how to see the divergence. If the price chart draws a double bottom or top, and the indicator at the moment does not want to repeat the formation of figures like the market, but shows a mismatch, then this should be regarded as the formation of an extended bearish or bullish divergence.
Bullish extended divergence
extended divergence in Forex
Figure 6. Extended divergence (bullish) on the chart.
If the chart shows a bullish extended divergence, then you need to look for an opportunity to buy, as prices will go up.
To recognize an extended bullish divergence in the terminal, first of all, you need to pay attention to the lower part or lows of not only the price, but also the basement indicator.
Usually, during extended bullish divergence, quotes draw a double bottom.
Important: the “double bottom” shape does not have to be made in the classic way. The second minimum value can be drawn slightly lower or higher than the first one.
Although the lows on the chart will be displayed at approximately the same level, the indicator will show a slightly different picture: the second low will be significantly higher than the first. If this condition is met, it means that we are dealing with an extended bullish Forex divergence, and the trader should look for profitable moments to buy.
Indicators for determining divergence in Forex
Divergence in Forex technical analysis is clearly visible with the help of certain indicators. On a bare chart, it is difficult to determine the divergence based on the highs and lows alone.
The divergence indicator installed in the terminal will help the trader determine the deviation of the price chart from the basement indicator. This similarity applies to all such indicators.
In other words, it turns out that the price chart differs from the indicator chart. As a result, their readings differ.
Best of all, Forex divergence is observed on such oscillators:
AO of bill Williams et al.
A well-defined divergence allows a trader to get a signal to enter the market in advance using one of the above indicators, which are set by default in the MT4 trading terminal. We have already considered that Forex divergence can be both bearish and bullish, i.e. it can be observed in a descending or ascending market.
Divergence trading with the MACD indicator
There are many Forex trading strategies, but we will look at the simplest one.
This strategy can be successfully used not only by novice traders, but also by professionals.
You can trade this vehicle on any currency pairs, but still, we recommend using quotes from the major series: EUR/USD, GBP/USD, etc.
We will look for divergence using the MACD indicator with the settings (5, 34, 5). working timeframe: H1.
We wait for the chart and indicator to show a discrepancy, i.e. divergence, and then we need to determine where the take profit and stop loss will be set.
Take profit can be placed above the second top by 20 points. We set the stop loss at the level where the divergence itself began to form.
So, we looked at what divergence is, learned about its types. We also analyzed examples of divergence in Forex. Now you know how to determine divergence in Forex. The MACD indicator will help you do this.