Podcast:

How Divergence can help identify high quality trade setups

In this weekly video:

00:29 – Divergence can help identify great trade setups

01:10 - There are so many ways to trade

01:35 – What is Divergence?

02:44 – 2 types of Divergence – Standard and Hidden Divergence

03:12 – You cannot take divergence signals by themselves

04:18 – Indicators are just an aid to alert you

05:02 – Contact me if you need more help

I'm going to talk about divergence and how spotting divergence can help you identify high-probability trade setups. Let's get into that and more right now.

Hi, Forex traders. It's Andrew Mitchem here, the owner of The Forex Trading Coach. This week, we're into video and podcast number 264.

Divergence can help identify great trade setups

I'm going to help you understand and explain to you all about divergence and how it can really help identify high-probability trade setups. It really is this amazing occurrence that you see on your charts, and it can really help identify great setups, but like all technical analysis, you cannot use divergence just by itself. You have to basically blend it with a really defined group of other indicators and tools to help you become a good trader and help you have a good strategy, but in this video, I want to talk just about divergence because it really is very powerful if you understand how to use it correctly.

There are so many ways to trade

As traders, there are unlimited ways of trading, and really, all we're trying to do is add as many factors, as many occurrences together showing at the same time to say, "Hey, this is a high-probability setup. Technically, this is looking good. It has all these things, A, B, C, D, E, F, G, in its favour. Yes, it's looking good. Let's take the trade."

There are so many ways to trade

What does divergence do? Well, divergence occurs on your charts, and mostly, you see it when you're using oscillators like RSI, or stochastic, or MACD. I use it only on stochastic myself, but it can be used on a variety of oscillating indicators, and what it's doing is showing us a difference between what the indicator is identifying should be happening in the price and what the price is actually really doing. When you get a conflict, say you get the indicator going one way and the price actually going the other way, so it's that conflict, which creates the divergence, and when you, for example, get the price making higher highs, and the indicator is suggesting the highs, and the indicator are going lower, that gives us a higher probability chance of a reversal from that uptrend.

Of course, you need candle patterns and you need it to occur in the right part of the chart. That's all additional material that I cover in depth in my course, but just understanding divergence and saying that a price is going up, the indicator is going down, the likelihood is that the price potentially now should start to reverse.

2 types of Divergence – Standard and Hidden Divergence

So you have what you call “Standard Divergence”, positive and negative. I also use something that's called "Hidden Divergence," so hidden positive divergence and hidden negative divergence. They help me identify continuation patterns far better. Again, I cover all that in detail if you'd like to know more in the course, but you use divergence with a number of other factors, and it really can help identify high-probability setups.

You cannot take divergence signals by themselves

As I mentioned at the beginning, you cannot use divergence just by itself. Don't just go out there looking for divergence and go, "Here's divergence on my charts. Therefore, I'm taking a sell trade or a buy trade." You can't do that. You have to blend it in with your overall big bucket basically of technical knowledge and put all these things together, but once you understand divergence and the difference between Standard Divergence and Hidden Divergence,