Divergence and convergence on Forex. What do you need to know?
If one of all the technical indicators had to choose one, experienced traders would probably opt for Forex divergence. And although universal indicators do not exist, it is divergence that shows excellent results. Let's take a closer look at it.
What is Forex divergence? This is an early signal of imminent market behavior. At a certain point, the strength of the bears or bulls reaches a peak, we see a divergence (divergence of price and indicator), which means that the market does not have enough strength to continue its movement - and it unfolds.
Synonyms of divergence - deviation, divergence, change of direction.
The following types of divergence are distinguished:
The classic can be observed with a trend reversal. About a quarter of traders know about the hidden and extended, which are a signal of the continuation of the trend.
The manifested divergence is a situation where we see a price increase on the chart and a decrease in the oscillator under the chart. The market is weakening and a trend reversal is possible soon.
In this case, it is a classic bear divergence.
If the trend is downward, and the oscillator also shows lows that are falling, then we can assume either a correction of the trend or a change in its direction. This is a bull divergence.
In other words, we call divergence based on the possible future direction of price movement: bull
- if the market goes up after the signal, bear - if it goes down.
In addition to divergence, the appearance of such a signal on the chart as the Forex convergence is also possible. This is a situation where we see a mismatch between falling price values and rising oscillator values. That is, on the graph we see maxima that are gradually decreasing, and the oscillator shows successively increasing maxima.
In fact, Forex convergence is a strong trend reversal pattern. You should wait for a signal that confirms the reversal, and open a deal.
Forex divergence indicators
Using certain indicators, it is not difficult to identify divergence on the chart. These oscillators include:
AO Bill Williams.
This is a signal for a trend reversal. If bears, we expect the price to move down, if bulls - up. The most important thing is to use the oscillator values to determine the type of divergence.
It is a signal that the trend is likely to continue. It’s hard to determine. It is possible only in situations when the market moved down. If the oscillator shows divergence, we should expect a further decrease in the market. The hidden Forex divergence can be compared with a slingshot. Oscillator readings - this is the slingshot. That is, after the correction, you can see a “breakthrough” in the price in the same direction as it was before the divergence.
A bit like a regular classic. Shows the formation of a figure similar to a “double bottom” or “double top”. So, we see the second bottom or top, which are located on the same level with the first, and the oscillator forms a second minimum or maximum, but at a different level, which differs from the first. This suggests that the trend will continue, the market has enough potential to continue the trend.