The one thing you have to do in trading is find a trading strategy or technique as part of your trading plan. Usually, people new to forex and stock trading search online for trading strategies and find themselves bombarded by an overwhelming number of options and are lost on where to start. It is tedious to back-test the numerous trading techniques that one is likely to find even on YouTube alone. That is why I recommended one useful and profitable trading strategy for beginner forex traders. Remember, different trading strategies work under different market conditions. Some trading strategies work on particular pairs only, and you have to know which currencies to trade depending on which technique you intend to use. However, Divergence is the one technique one can use on any given currency pair, commodity, or stock. The technique also applies to cryptocurrency trading and indices investment. The fact that you can use the technique on any currency pair means that you need not worry about what to trade on forex.
What is Divergence?
Divergence refers to a state of disparity. This means that there is a discrepancy between the two elements under comparison. In other words, it means that there is a disagreement. In trading, one compares the price chart with an indicator chart when checking for Divergence. You will get different types of divergence systems depending on which indicator you use. For example, we have RSI divergence gotten using the Relative strength index indicator versus the price chart. Then there is MACD divergence gotten using the Moving Average Convergence Divergence indicator versus the price chart. Other indicators, such as the Awesome Oscillator, can be used to check for Divergence. As long as you have an oscillating indicator and the price chart, you can be able to check for Divergence and use it to get your prediction of gold prices and become a profitable forex trader.
RSI-Divergence (Relative Strength Index Divergence)
Before looking at RSI divergence, it is important to learn about market structure as a prerequisite.
Market structure: In a nutshell, market structure refers to the chart structure whereby the price makes a series of highs and lows. MS (A market structure is divided into two parts. One is a downtrend structure, also known as a bearish or sales structure. The other part of MS is an uptrend structure, also known as a bullish or buy structure. In a bearish structure (downtrend), the price makes a series of highs and lows such that they follow one another in a descending sequence of Lower-highs and lower-lows. That is, if you compare the current swing high with the previous one, the current high should be lower than the previous one. In the case of lows, when you compare the current low with the previous one, then the current low should be lower than the previous one. The same applies to highs. The next lows and highs to form ought to be lower than the current ones. In an up-trending market (Bullish structure), The price makes higher highs and higher lows as price levels increase. Things get easier after having understood the market structure, it is possible to use Divergence.
The RSI indicator is an indicator you can add to your MT4. To add the indicator to your chart, navigate to the top-left corner of your MT4/5 and click on INSERT>INDICATOR>OSCILLATORS>RELATIVE STRENGTH INDEX and click okay on the next window. The indicator will be successfully added to your cart. It should appear on a window just below the price chart and with default settings. Usually, it appears as a blue line with dotted lines marking the values 30 and 70. The RSI indicates the market strength for buys and sells. A value below 30 indicates that the momentum is getting exhausted as the market for the particular trading instrument is in an oversold state. An RSI value above 70 indicates that the particular instrument on the chart is overbought. Usually, the price reverses once it has been overbought or oversold but not immediately. Divergence is important in identifying when the overbought state becomes unsustainable, signalling a reversal.
RSI Divergence: One condition for RSI divergence is an overbought or oversold market condition.
Bullish RSI Divergence- occurs when the RSI indicator makes higher highs, and higher lows and the price keeps making lower highs and lower lows. The disparity amounts to Divergence because, before the Divergence, the two were both making lower highs and lower lows. Divergence becomes completed when the price reverses, makes the first higher low and higher high and starts to move in the same structure as the RSI indicator. That means the downtrend has ended, and an uptrend has begun. Once you identify the start of an uptrend, it makes sense to buy and follow the market in the newly formed trend.
Bearish RSI Divergence occurs when the RSI indicator chart makes lower highs and lower lows, and the price makes higher highs and higher lows. Once you spot the Bearish RSI divergence, you wait till the price makes the first lower high and lower low in agreement with the RSI indicator and then sell. The selling opportunity comes from a trend reversal at a place where the price is overbought, and you wait till the overbought status becomes unsustainable and take a sell when the price reverses in line with the new trend.
Advantages of the RSI divergence strategy
One advantage of the RSI Divergence strategy is that it is procedural, meaning that you have only a few steps to set up the system, followed by a very easy-to-read signals setup.
The other advantage is that the system is useful in determining market reversals. Divergence is a useful method for holding long-term trades if you want a swing trading strategy. Divergence works well for anyone who aspires to learn a technique under the subject of day trading for beginners.
The other reason why Divergence is a great technique is that the method is a legit forex strategy with a proven track record for success. Some individuals use the technique alone and achieve top-quality results throughout their trading career.
Remember, you need a licensed broker regardless of your strategy. Search for the best platform for trading and see how RSI divergence works with such a platform.
MACD Divergence
The Moving Average Convergence Divergence is an indicator that shows bullish or bearish convergence or Divergence using a bar chart. Comparing the peaks of the MACD with the highs and lows of the price chart will allow you to tell whether there are any disparities. If there are any, then there is Divergence. The MACD divergence has bullish and bearish setups, and you must compare the swing highs and swing lows to check for Divergence.
Awesome Oscillator Divergence
This indicator is also found under the same folder as the RSI and the MACD indicators.
As you can see, the strategy is easy to follow. One way to become successful is by executing a single-ting strategy consistently. RSI Divergence could be your go-to trading strategy. With this technique, you can have a win rate of fewer than 50 % and still be profitable because successful trades will cover any prior losses and leave you with a huge profit margin.
Note: This does not amount to financial advice; I share a useful technique with you out of the goodness of my heart for good Karma.
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