Divergence Trading

What if there was a low risk way to sell near the top or buy near the bottom of a trend?

What if you were already in a long position and you could know ahead of time the perfect place to exit instead of watching all your unrealized gains vanish before your eyes because your trade reverses direction?

What if you believe a currency pair will continue to fall but would like to go short at a better price or a less risky entry?

Well there is a way. It’s called divergence trading.

Divergence is basically price action measured in relationship to an oscillator indicator. It doesn't really matter what type of oscillator you use. You can use RSI, Stochastic, MACD, CCI, etc. etc. The great thing about divergences is that you can use them as a leading indicator and after some practice, it’s not too difficult to spot.

When traded properly, you can be consistently profitable with divergences. The best thing about divergences is that since you’re usually buying near the bottom or selling near the top, your risk on your trades are very small relative to your potential reward. Cha ching!

Higher Highs and Lower Lows

Just think “higher highs” and “lower lows”.

If price is making highs, the oscillator should also be making higher highs. If price is making lower lows, the oscillator should also be making lower lows.

If they are NOT, that means price and the oscillator are diverging from each other. Hence the term, divergence.

There are TWO types of divergence:

1. Regular
2. Hidden