Divergence: an indispensable tool for working with a trend For effective and profitable forex trading, market participants apply technical analysis. The main task of technical market analysts is monitoring the movement of the trend to find the right entry point to the market or exit from the position.
At Forex, there are many methods for determining the strength of the trend and its direction. Today we will consider one of the methods called divergence. The concept of divergence in Forex means a situation in which the price (with its movement) begins to show disagreements with the indicator data.
In other words, the indicator refutes the price movement, instead of confirming it. For example, on the chart we can observe the growth of the currency, and the oscillator, in its turn, demonstrates its decline. But in reality, this is not a program failure or an indicator error (as most market participants believe): the divergence is a regularity-the sequence of behavior of currency quotes. The situation when there is a divergence in the market is not uncommon: this may indicate only one factor - it is worth waiting for the direction to change. After all, the divergence is a warning that the current movement is beginning to lose its force. But, most of the market players do not have this knowledge and simply do not know how to profitably use this information. There are three types of divergence in the forex market: - standard (classical); -closed; -extended.
The classical version of the divergence is a situation - a position on the market in which real value and indicator data are directed in parallel, and then an insignificant mismatch in motion begins: we see data from the price chart that differ from the indicator. Like a currency tool, which moves at a price down or up, the divergence is distinguished both by bull and bear.
Bearish arises at a time when the price on the schedule is close to the next peak. It is in this case, the indicator may no longer show a price increase, but on the contrary, it shows a decline or it stagnates at one point, being at rest for some time. That is, the bearish divergence testifies to the imminent approach of a downward trend - and for the trader it is a signal: it's time to sell. Bullish divergence is a situation opposite to the bearish. This happens when the asset has fallen to almost the next minimum value, while the indicator at that time freezes (or shows an upward trend). This means that the decline in exchange rates comes in a logical conclusion, and soon the growth of quotations will start. For a trader, this only confirms the fact that it's time to make a purchase. The latent discrepancy is a situation where we can witness an apparent divergence between the real price of the asset (the price schedule) and the indications that the indicator provides. This situation is because when the price creates a new minimum on the chart, the instrument, on the contrary, demonstrates the maximum value. It is the latent discrepancy that gives the trader a chance to catch the difference that occurs on the pullback and to enter the market the most favorable point of the trend. The extended version of the divergence is similar to the classical one: the only difference is that in the classical divergence the differences in the information of the graph and the indications of the indicator are significant, and with the expanded version of the divergence, the indicators are approximately the same.
An expanded bullish divergence can be formed when, in decline, the new maximum of the contraction almost exactly corresponds to the boundaries of the previous vertex, and the tool itself at the given time shows very low maximum values. An expanded bullish divergence can be compared with a double bottom. We can see this as follows: with the growth of the trend, the next maximum is close to the previous reduction value, and the analysis tool itself shows us a significantly overestimated maximum value. Please note that the entire signal area (with a divergence) can be divided into three classes - the values of A, B, C. Class A is the most significant, it provides us with the most accurate testimony. Often, it is a bright turn of the trend (a cardinal turn and a change in the direction of prices). In other words, the decline in price increases is followed by a decline. - Class B. It is the average signal (medium strength). It can appear if the so-called double top is reached (the price was able to reach the previous maximum peak), and the oscillator showed a maximum, below the previous data. - With a class. It is the result - the result of delay (late) reflection in the market. They can be completely ignored: the signal intensity is rather small, and consequently, it does not particularly affect the price in the future. After all the information, a trader may have a completely logical question - how can you understand that there is a divergence in the market? If the price movement is not identical to the values of the indicator, this indicates that there is a divergence in the market. The fact of the discrepancy can be identified on the indicators MACD, oscillator Stochastics and RSI: to determine the divergence, you need to monitor the maximum data on the price charts and watch the indicator readings. In a period when the currency is close to a strong level of support or resistance, it is the discrepancy that will indicate to the player what will happen to the price further. Will it go down or, on the contrary, rise. Divergence is just a signal - a sign to the fact that growth or fall comes to an end. This is a confirming sign, but it is necessary to be guided by other means of those. analysis. Look for it at the senior and high intervals: along with other tools, factors of a fundamental nature, it will find a favorable point for entering the market.