How to use Divergence to earn money in Forex?
I will begin by explaining what is the divergence? It is considered a very effective tool for Forex. A divergence occurs when prices are high and low in a definite direction in the market, while an oscillator-type indicator shows a direction opposite to the trader notes in prices. In other words the divergence arise when comparing the price movement with some technical indicator. Divergence is considered important signals that are recommended for use in conjunction with other indicators to find possible market turns.
In the Forex market, oscillator indicators, allow the trader to observe differences between prices and the indicator, which usually indicate in advance any changes in market trends or simply tell you which the continuation of market is. Some of the Forex indicators that allow the trader to observe divergences are MACD, RSI and Stochastic.
There are 2 types of Divergence:
1. Classic or regular divergence
2. Hidden or concealed divergence
Classical Divergences: usually signal in advance a possible drastic change in market trend.
Hidden Divergence: These unlike the classic, allow the trader to see in advance which will be the continuation of the market after a time of consolidation.
How to use the divergence indicator?
In the case of classical divergences are used in the following manner and exemplified below:
For example: if prices or a pair has lower low, while the indicator shows a higher low or just begins to rise, then it would mean a possible change in the bearish market trend bullish. The same can happen in the opposite direction, if a pair shows a higher high, but the indicator does not make a higher high, it could mean a possible change from a bullish market to bear one.
In the case of hidden Divergence:
For example: if a pair the prices or minimum a couple presented very high, while the indicator shows a lower minimum or just start to fall, then this will mean a possible continuation to the market uptrend. The same applies if new highs are shown in the market, and the indicator shows a lower minimum, it will mean a continuation of downtrend.
To earn more money by using the divergence you will need to follow these rules, and your chances of loss could be reduced:
• To ensure a divergence, you should always look at market prices as follows:
1. Higher high than the previous high or new high.
2. Lower lows than the previous low
3. Double Top
4. Double Bottom
If you do not find this first, best not to try to find an indicator to buy or see what kind of divergence it is.
• Once you trade, it is advisable to draw a line between the highest prices prior to the new height. Do the same from low prior to the new low so you can make your analysis more quickly and clearly.
• If there is a divergence and the market moved or reversed at some point, then do not do anything. Yes this happens and you realize that a divergence occurred and did not see it , wait until the market returns to show a divergence to take next trade.
• Divergences over longer periods are more accurate. You get fewer false signals. At long periods you will have fewer transactions than in short periods, but the earning potential is greater~In long periods you will have fewer transactions but the earning potential is greater~{The earning potential is greater at long periods but you will have fewer transactions}~The earning potential is greater at long periods but you will have fewer transactions than in short periods~The earning potential is greater at long periods than short periods but you will have fewer transactions}~At long periods you will have fewer transactions than in short periods, but the earning potential is greater~In long periods you will have fewer transactions but the earning potential is greater~{The earning potential is greater at long periods but you will have fewer transactions}~The earning potential is greater at long periods but you will have fewer transactions than in short periods~The earning potential is greater at long periods than short periods but you will have fewer transactions}. Divergences in shorter time periods will be more frequent, but are less reliable. Use the differences in periods of 1 hour onwards.
• It is important to always explore, acknowledge and observe carefully the histograms to detect signals in time and never make a move if you are unsure.
• Remember that no investment is risk free and a gauge will help with your trades more effectively when used in conjunction with other tools.
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