How to Best Use Divergence in the Forex Market

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#475: How to Best Use Divergence in the Forex Market

In this video:

00:26 – Using Divergence

01:27 – The 2 types of Divergence

02:22 – Reversals and Continuation Patterns

03:49 – Continuation Patterns are Higher Probability Trades

04:59 – Regular and Hidden Divergence

05:32 – Blueberry Markets for MT4 and MT5

Does divergence really work in the Forex market? And if so, how can you best use it? Let's talk about that a more right now.

Hey, there Forex traders, this is Andrew Mitchem here, the owner of the Forex Trading Coach with video and podcast number 475.

Using Divergence

I want to give you a really good bit of trading information here regarding the use of divergence. And you'd know that if you've been following me for any length of time, I use predominantly candle patterns. I look at price action, I look at support and resistance levels and strength and weakness on the charts, as that to me is the most important information. However, there is one indicator that I use of the more traditional lagging indicators, and that is the stochastic indicator. And I use that in a few ways. It helps me to determine if the price is overboard or oversold.

And what that means is if the price is going up and up and up and it's then overbought. If I were to see a reversal pattern, that means that it's in quite a high probability part of the chart, that the price cannot keep going up forever and therefore it's lightly to then pull back. And I can take a potential cell position, but I also use the stochastics to help me with divergence.

The 2 types of Divergence

Now, there are two types of divergence, those regular or standard divergence, and there is what we call hidden divergence. Now, in basic terms, divergence is when, let's say the indicator is going one way, but in reality the price is going the other. And that causes a divergence. One thing's heading up, the other's heading down, and you get the opposite, like the conflict going on there. So that is a divergence. Now there's sort of more specifics that we look at than that, whether we're looking at that happening with the lows and the price getting higher or the highs and the price getting lower, different things like that.

But in basic terms, divergence means price going one way, the indicator suggests the price should be going the other way, and then you generally get a reversal or a continuation happening. So it's a really good early warning system for you as well.

Reversals and Continuation Patterns

So two ways of trading it for me reversals. That is when you get regular divergence with the price coming off the bottom or the upper Bollinger Band area. So in other words, the price is either oversold if it's at the bottom Bollinger Band or overbought. If it's at the upper Bollinger Band and stochastics are either low below the 20 or high above the 80 level. And if you get that showing, then you have yourself a high probability chance of a reversal trade. Now of course, you cannot just say, "Here's a positive divergence signal, the market's oversold the price is going to go up." It's not as simple as that.

You still need the candle pattern and you still need it to come off the right price level. Strength and weakness is always important. If you get a trend line break, have you got a good place for your stop loss, plenty of room to move for your profit target? All those things that we talk about all the time are still massively important. But by piecing together all these little parts of the jigsaw, if you can then add a divergent signal on top of everything else that you see, that to me adds more and more quality, more and more probability of success for your candle pattern and your setup that you are taking. So I really like reversal patterns and standard divergence,