It is enough that the previous peak is slightly lower than the next one. To determine the classic bullish divergence of Forex, you should pay attention to the lows of the chart, as well as the indicator. If the market has a regular bullish divergence, then the candlesticks will draw a lower price value, and the indicator, on the contrary, will draw a higher low. In this case, we should expect an upward movement; that is, the trader needs to get ready to buy. You should use any trend indicator like moving average to know the primary trend and get confirmation from divergence to enter a trade.
For example, you can use 20 — period simple moving average. If you find a bullish divergence and the price is above the 20 SMA, then you enter the long position. You can place the stop-loss slightly below the recent swing low while the take profit can be placed near the next resistance level. Extended Forex divergence is somewhat similar to the usual classic divergence. If this feature is observed, then the price will continue to go in the same direction. It is important to note that Forex extended 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 that it was before.
If there is an extended bearish divergence on the chart, it can only mean one thing; prices will continue to go down, so you need to look for a selling opportunity. To determine the extended bearish divergence, the trader should pay attention to the peaks highs not only on the chart but also on the indicator. Typically, this kind of divergence is seen along the tops during a big move.
The market draws a double top, but the second price peak may be slightly higher or lower than the previous value.
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Even if the top levels are the same, the indicator will show a lower second high. The indicator will not draw the double top that is seen on the price chart. You can solve this problem differently. Suppose the price chart draws a double bottom or top, and the indicator does not repeat the formation of patterns like the market but shows a mismatch. In that case, this should be regarded as the formation of an extended bearish or bullish divergence. If the chart shows an extended bullish divergence, you need to look for a buying opportunity as prices go up.
To recognize an extended bullish divergence in the terminal, it is necessary, first of all, to pay attention to the lower part or lows of not only the price but also the basement indicator. Usually, during an extended bullish divergence, quotes draw a double bottom. 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 divergence in Forex, and the trader should look for profitable moments to buy. If you see an extended divergence on the chart, then take the confirmation from any other indicator. In Forex, hidden Forex divergence informs about the continuation of the trend. However, it is rather difficult to recognize it in a trading terminal.
Hidden Forex divergence gives a clear signal to open a buy or sell position. If there is a hidden bearish divergence in the market, one can expect that the price chart will continue its downward movement. When there is a hidden bullish divergence on the chart, then the price will rise. To see the hidden bearish divergence in Forex, you need to identify the peaks of candles or highs of the price, as well as the indicator. The MACD indicator can be used to identify hidden divergence.
This scenario emerges only when the price moves down. If the indicator shows a divergence at this moment, then a downward movement can be expected in the future. To detect hidden bullish divergence, you need to pay attention to the lows of the chart, as well as the indicator.
HiddenDivergence
This kind of divergence occurs when the market is upward, drawing high lows, and the indicator reading lower. Most traders see divergence on the chart and simply enter the trade without thinking for another moment. The need is to filter the false signals and find a high probability trade setup.
Hence, do not enter the trade impulsively rather wait for a brief pullback and then enter. Also, you can avoid a bad trade by following the candles. For example, if you see a bullish divergence, then wait for a bullish candle to appear and then enter. Do not enter a trade if there is a long wick on the upside of the candle. You can find divergence with any oscillator indicator. However, the results vary with the currency pairs and the chosen indicator.
Among all, we have shortlisted the top three oscillator indicators that can be very helpful in your trading.
Top 4 Video Tutorials
The MACD indicator can be very beneficial for finding the divergence and spotting early trend reversal in currencies. You can use the default settings of the indicator on any timeframe. However, it is better to use 1-hour timeframe. You can use take profit and stop-loss at fixed 20 pips difference or you can use the support and resistance levels as well.
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The CCI indicator is another good choice to determine the divergence. It can be applied on any timeframe with default settings. However, it is recommended to use minute, minute, and 1-hour timeframes. You can use the oversold and overbought conditions to exit the trades.
Divergence Definition and Uses
Stochastic is a widely used indicator for divergence. The recommended timeframe is 1-hour while the indicator can be used to exit the trades based on overbought and oversold conditions. Divergence is a means to find the early trend reversal signal. There can be three types of divergence, i. Also, there could be a higher high or equal high. In this price action, if there is a lower low in the oscillator, it indicates a hidden bullish divergence. It signals that the price could continue to go north. Looking at the indicator, it leaves a lower low.
Hence, showing divergence and indicating that the market has turned into an uptrend and will possibly continue its move up. In the market goes into a transition from an uptrend to a downtrend, the price which was making higher highs now starts to make lower highs. In addition, the oscillator puts in a higher high for the lower high in the price chart. Thus, showing a hidden bearish divergence.
It is an indication that the market is going to continue in a downtrend. Later, it turned directions and made a higher low instead of a higher high. But the RSI made a higher high for the same move.
Thus, indicating divergence and most probable continuation of the downtrend. Save my name, email, and website in this browser for the next time I comment. Forex Academy. Home Forex Education Forex Course Please enter your comment!