Divergence Trading in the Forex Market

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#519: Divergence Trading in the Forex Market

In this video:

00:29 – Divergence. What is it and how do we use it? 

00:55 – Continuations and Reversals

02:02 – Trading with both patterns

02:33 – New trades or Early exits  

03:39 – Book a call with myself and my team

03:53 – Blueberry Markets

I'm going to talk today about trading divergence in the Forex market. It's a very powerful tool that can help you to identify continuation patterns and reversal patterns. So let's get into that and more. Right now.

Hey there, Forex Traders! This is Andrew Mitchem here at the Forex Trading Coach, For a video and podcast number 519.

Divergence. What is it and how do we use it? 

So today I want to talk about divergence is a very powerful tool that can help you to identify both reversal patterns and continuation patterns.

And divergence occurs when you use an indicator such as like the RSI or my case, the stochastic indicator, and it occurs when the price moves away from the direction that the indicators suggest the price should be moving in.

Continuations and Reversals

And there's two ways that we use divergence and we use it for a continuation pattern, which is what they call hidden divergence, and that is when the price is moved up, it then pulls back and we get a hidden divergence looking for the price to continue again.

So what you get there is in an uptrend, the price makes higher lows and the indicator makes lower lows. And when you see that occur, that gives you the best indication that the price is likely to continue upwards.

And we see regular divergence occur when we're looking for a trend reversal. Now, this is certainly a higher risk type of trade because you're looking at taking a sell trade at the top of an uptrend or buy trade at the bottom of a downtrend.

So with regular divergence in an uptrend, what we're looking for there is the price making higher highs, but the indicator fails to do so. In fact, the indicator makes lower highs, so you get the price doing one thing and the indicator doing the other. This suggests a reversal pattern or regular divergence.

Trading with both patterns

So with both of these two patterns, both regular divergence and hidden divergence, you certainly need everything else that you're looking for to occur first.

In my case, we're looking for the candle pattern to be in the right part of the chart. We're looking for round number, strength and weakness, etc. And for me, divergence is just like the cherry on top. It's the thing that makes a trade go from a pretty good trade to a really good trade because there's one extra layer of confirmation there.

New trades or Early exits  

So two things you can do here. If you're not currently in a trade and you see a trade set up and you get either reversal patterns or continuation patterns occur, then what you can do is it gives you a high probability entry position.

If you are already in a trade and let's say you're in a buy trade and you're not quite at your profit target and you see a negative or hidden negative divergence occur, in other words, the price looks like it's going to fall and you're still in a buy trade.

It can give you an early warning system to get out of the trade early. So two ways of using divergence there. One, if you are looking to get into trade, number two, if you are already in trade and potentially might need to get at early and two different types of divergence, regular divergence for reversals, hidden divergence for continuation patterns, my personal favorite is always hidden divergence because it gives me the opportunity to ride the trend after a slight retracement or pullback.

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