Divergence is a familiar term in trend trading. Many traders use Divergence in combination with other indicators to identify reliable forex signals. So specifically, what is divergence in forex trading? Is this tool as useful as many traders say? Find out with Forex Trading right here!
What is divergence trong forex?
What is divergence in current forex trading? Simply put, this is the English name for the divergence phenomenon in the foreign exchange market. This term indicates that the price moves in the opposite direction of the indicator’s movement. In particular, the directions are determined by the tops and bottoms of the price candlestick combined with the indicator. Divergence is a signal that the current trend gradually weakens, giving way to an established trend reversal.
Meaning of what is divergence?
Based on the divergence signal, traders can predict the next price movement. From there, determine the most effective entry point. Specifically:
- In an uptrend, this indicator shows a downward trend: This is a signal that the price is about to enter a bearish reversal phase.
- In a downtrend, this indicator tends to move up: This is a signal that the price is about to reverse and enter the rising phase.
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Some of the most common types of divergence
Depending on the form and characteristics, Divergence is divided into 3 types. Each type provides traders with different trading signals. Specifically:
Regular divergence
Divergence is often a signal to identify a price trend reversal, including:
Positive divergence
Positive divergence, also known as bullish divergence, in English, is Bullish Divergence. So Bullish What is divergence? This indicator appears during a downtrend. When the price chart has a lower low than the previous low and the divergence indicator shows a higher low. The downtrend is weakening, signaling that an uptrend reversal is about to form.
Traders can based on this signal expect a reversal. However, to be sure, you need to combine it with other signals. Such as consensus trading volume or bullish candles confirming the trend.
Negative divergence
Negative divergence, also known as bearish divergence, in English, is Bearish Divergence. Bearish What is divergence? This divergence phenomenon occurs during an uptrend. At this time, the price creates continuous peaks, each peak is higher than the previous one. However, the indicator goes in the opposite direction, the next peak is lower than the previous one. Upward momentum gradually weakens and a bearish price reversal is imminent.
Traders can rely on this signal to trade with a reversal strategy, from increase to decrease. Similar to positive divergence, to use negative divergence effectively, you also need to wait for other signals such as consecutive red candles, bearish Japanese candlestick reversal patterns, or trading volume.
Hidden divergence – Hidden what is divergence?
This type of divergence is used in price trend trading. Include:
Hidden bullish divergence
In strong upward price trends, hidden bullish divergences often appear. At this time, the next bottom will be higher than the previous bottom. At the same time, the divergence indicator will create a lower bottom than the previous bottom. Signaling that the price will continue to move in an upward direction.
Hidden bullish divergences often appear in strong uptrends
Traders can open a buy position to trade with the trend. Besides, to increase the probability of profit, you should combine with other signals such as continuation patterns, increasing green candles, consensus trading volume,…
Hidden bearish divergence
In a strong downtrend, the next peak is continuously lower than the previous peak, and the divergence indicator has the next peak higher than the previous peak. This shows that the price trend will continue to decrease. Traders can enter a Sell order to trade with the trend. However, to minimize risk, traders also need to combine it with signals such as continuing bearish price patterns, and red candles,…
Exaggerated divergence
With this type of divergence, the price will create two equal peaks or two bottoms. This signals that the sideways trend will end soon, preparing to form a new trend. Magnified divergence also includes 2 types:
Magnified divergence increases
In English, exaggerated bullish divergence translates to the term Exaggerated Bullish Divergence. This phenomenon occurs when there are two equivalent bottoms, and at the same time, the indicator diverges to create the next bottom higher than the previous bottom. Signal that the sideway trend is about to end, gradually shifting to an uptrend. Traders can take advantage of this opportunity to enter Buy orders.
Reduced magnification divergence
Exaggerated Bearish Divergence in English is called Exaggerated Bearish Divergence. This divergence appears when two peaks with equal prices are formed, and the indicator creates the next peak lower than the previous peak. This signal shows that the sideways trend is gradually ending and is about to turn into a downtrend. Traders can take advantage of this opportunity to open a Sell order.
Which indicator should you combine Divergence with when trading with the trend?
To identify divergence signals, traders need to rely on the price line, combined with other technical indicators. A typical example is the group of momentum indicators.
MACD divergence
MACD is also known by its full name Moving Average Convergence Divergence. The purpose of creating this indicator is to identify changes in strength, as well as trend momentum and duration.
The divergence signal from the MACD line and the price line is quite strong. However, indicator MACD divergence usually follows the price, meaning there is a certain lag. Therefore, traders need to coordinate with many other indicators to increase trend reliability. Learn advanced MACD strategy for the most accurate technical analysis.
RSI divergence
RSI is a relative index that helps traders determine whether the market is in the overbought/oversold stage. The RSI divergence indicator is shown as an oscillator between two extreme lines of 0 and 100. Traders can base on this oscillation line and price line, thereby identifying divergence and finding the direction of price movement.
RSI is a relative index that helps traders determine whether the market is in the overbought/oversold stage
RSI reacts to price so it is considered a strong indicator. However, RSI still has a certain amount of noise.
Stochastic What is divergence?
Stochastic divergence also belongs to the oscillating indicator system, often used to measure the strength of buying and selling forces in the market. This indicator also belongs to the oscillating group, helping traders determine the strength of buying and selling forces in the market. The two extreme points that Stochastic oscillates around are 0 and 100.
If you see the Stochastic indicator is greater than 80, it shows that the buying force is very large. Conversely, if the indicator is less than 20, the sell signal is too high. The price line and the Stochastic indicator appear to be different, forming a divergence. Traders need to seize this good opportunity to capture the trend.
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Note when using What is divergence?
Divergence signals help traders determine the direction of future price movement. In the forex market, nothing is exact, including this signal. Therefore, traders need to pay attention to the following things when using Divergence:
- Select reliable divergence signals before placing orders.
- Divergence should only be considered as an indicator when trading forex.
- Monitor the trading volume and price action associated with Divergence signals to increase the accuracy of your judgment.
- Observe the duration of the divergence phenomenon. If the divergence lasts too long, traders need to wait for another pullback before deciding to enter the order.
Conclude
Above, Forex Trading has provided you with the most detailed information about What is divergence. Hopefully from that useful knowledge, traders can add it to their forex trading handbook. Follow Forex Trading to be more successful in the market.
FAQs
Should you use Divergence in forex trading?
Have. However, traders should not rely too much on divergence to trade to avoid losses. In addition, it should be combined with other indicators and models to make more accurate decisions.
How to detect What is divergence?
To detect divergence, traders often use technical indicators such as RSI, MACD, and stochastic. By comparing the peaks and troughs of the price with the peaks and troughs of the indicator, they can identify signs of divergence.
Is Divergence always correct?
No, divergence is not always true. It is just an analysis support tool. Traders need to combine it with other analytical tools and methods to make accurate decisions.
