Forex Divergence Strategy

The Forex Divergence Strategy is used to identify trend reversals in the market. This guide will mention the strategy and how you can trade it.

What is the Forex Divergence Strategy?

Forex Divergence is a common strategy that determines key market reversals. Divergence occurs when the price of a currency pair moves in a different direction than technical indicators like the RSI or MACD. This can be an early sign of a trend reversal or a correction in the market.

There are two main types of divergences:

Regular Divergence: A regular divergence occurs when the price of a currency pair creates a higher high or a lower low. In comparison, the technical indicator makes a lower high or a higher low. It indicates a potential trend reversal.

Forex Divergences
Forex Divergences

Hidden Divergence: A hidden divergence occurs when the price of a currency pair creates a lower low or a higher high. At the same time, the technical indicator develops a higher low or a lower high. It signifies trend continuation.

Forex Divergence Strategy

For the Forex Divergence Strategy, first, you have to identify the trend. You can do so by a trendline or a moving average.

Once the trend is identified, you should consider divergences between the price action and the technical indicator. You can use RSI or MACD to spot the divergences.

The price forms a lower low for a regular bullish divergence while the indicator creates a higher low; you can go long. Conversely, for a regular bearish divergence price makes a higher high while the indicator creates a lower high; you can go short.

For a hidden bullish divergence, the price makes a higher high while the indicator develops a lower high; you can go long. On the other hand, for a hidden bearish divergence, the price develops a lower low while the indicator creates a higher low; you can go short.

Buy Signal

  • Price should form a lower low, while the RSI should create a higher low.
  • Price should form a higher high, while the RSI should create a lower high.
  • Wait for the price to go upwards and then enter the trade.
  • Place a stop-loss at the recent low.
  • Exit the long position at the recent high.
Forex Divergence buy signals
Forex Divergence buy signals

Sell Signal

  • Price should form a higher high, while the RSI should create a lower high.
  • Price should form a lower low, while the RSI should create a higher low.
  • Wait for the price to go downwards and then enter the trade.
  • Place a stop-loss at the recent high.
  • Exit the long position at the recent low.
Forex Divergence sell signals
Forex Divergence sell signals

Forex Divergence Pros & Cons

Pros

  • Forex Divergences provide an early signal of a potential trend reversal.
  • It can be used with various technical indicators, such as the MACD, RSI, and Stochastic.
  • It can be used in both short-term and long-term trading.

Cons

  • The Divergences can occur frequently, but not all divergences are reliable signals of a trend reversal.

Conclusion

The forex divergence strategy spots potential trend reversals in the market.

You should use technical indicators such as the MACD, RSI, and Stochastic to identify divergences and confirm the signals with other technical indicators or chart patterns.

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