Forex divergence is a popular trading strategy used by forex traders to identify potential trend reversals in the market. It is a powerful tool that can be used to anticipate future price movements and make profitable trades. However, it can be challenging to identify divergence patterns, especially for beginner traders. This is where a Forex Divergence Cheat Sheet comes in handy. In this article, we will discuss what forex divergence is and how to use a cheat sheet to identify it.
What is Forex Divergence?
Forex divergence is a price action pattern that occurs when the price of an asset moves in the opposite direction of a technical indicator. In other words, when the price of a currency pair is making higher highs, but the technical indicator is making lower highs, this is a bearish divergence. Conversely, when the price is making lower lows, but the technical indicator is making higher lows, this is a bullish divergence.
Divergence is an indication that the momentum of the current trend is weakening and that a reversal may be imminent. Traders can use this information to enter or exit trades, depending on the direction of the divergence.
Using a Forex Divergence Cheat Sheet
A Forex Divergence Cheat Sheet is a tool that traders use to quickly identify divergence patterns in the market. It is essentially a reference guide that provides traders with a list of indicators and the type of divergence that they can identify.
To use a Forex Divergence Cheat Sheet, traders first need to have a good understanding of what divergence is and how it works. They should also have a basic knowledge of technical indicators, as these are the tools that they will use to identify divergence.
Once traders have this knowledge, they can refer to the cheat sheet to quickly identify divergence patterns in the market. For example, if a trader sees that the price of a currency pair is making higher highs, but the MACD indicator is making lower highs, they can quickly identify this as a bearish divergence using the cheat sheet.
Types of Forex Divergence
There are two main types of forex divergence: bullish and bearish. Bullish divergence occurs when the price of an asset is making lower lows, but the technical indicator is making higher lows. This is an indication that the momentum of the current downtrend is weakening and that a reversal to the upside may be imminent. Traders can use this information to enter long positions or exit short positions.
Bearish divergence, on the other hand, occurs when the price of an asset is making higher highs, but the technical indicator is making lower highs. This is an indication that the momentum of the current uptrend is weakening and that a reversal to the downside may be imminent. Traders can use this information to enter short positions or exit long positions.
Indicators to Use for Divergence Trading
There are several indicators that traders can use to identify divergence patterns in the market. Some of the most popular indicators include:
- Moving Average Convergence Divergence (MACD) – This indicator is a popular tool used by traders to identify trend changes and momentum shifts. It consists of two moving averages that oscillate around a zero line. When the MACD line crosses above the signal line, this is a bullish signal. Conversely, when the MACD line crosses below the signal line, this is a bearish signal.
- Relative Strength Index (RSI) – This indicator measures the strength of the current trend and identifies overbought and oversold conditions. When the RSI is above 70, this is an indication that the market is overbought and that a reversal to the downside may be imminent. Conversely, when the RSI is below 30, this is an indication that the market is oversold and that a reversal to the upside may be imminent.
- Stochastic Oscillator – This indicator measures the momentum of the market and identifies overbought and oversold conditions. It consists of two lines that oscillate between 0 and 100. When the stochastic oscillator is above 80, this is an indication that the market is overbought and that a reversal to the downside may be imminent. Conversely, when the stochastic oscillator is below 20, this is an indication that the market is oversold and that a reversal to the upside may be imminent.
- Commodity Channel Index (CCI) – This indicator measures the deviation of an asset’s price from its statistical average. When the CCI is above 100, this is an indication that the market is overbought and that a reversal to the downside may be imminent. Conversely, when the CCI is below -100, this is an indication that the market is oversold and that a reversal to the upside may be imminent.
Using a Forex Divergence Cheat Sheet, traders can quickly identify the type of divergence that is present in the market based on the indicator that they are using. For example, if a trader is using the MACD indicator and sees that the price is making higher highs while the MACD is making lower highs, they can quickly identify this as a bearish divergence using the cheat sheet.
Benefits of Using a Forex Divergence Cheat Sheet
Using a Forex Divergence Cheat Sheet has several benefits for traders. Firstly, it allows traders to quickly identify divergence patterns in the market, which can save time and increase trading efficiency. Secondly, it provides traders with a reference guide that they can use to learn about different indicators and the type of divergence that they can identify. This can help traders to expand their knowledge and become more proficient in identifying divergence patterns in the market. Finally, it can help traders to make more informed trading decisions and improve their overall trading performance.
Conclusion
Forex divergence is a powerful tool that traders can use to identify potential trend reversals in the market. However, identifying divergence patterns can be challenging, especially for beginner traders. Using a Forex Divergence Cheat Sheet can help traders to quickly identify divergence patterns in the market and make more informed trading decisions. By understanding the different types of divergence and the indicators that can be used to identify them, traders can improve their overall trading performance and achieve greater success in the forex market.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
