Divergence Day Trading: What It Is, Types, & Indicators

All you need to do to trade it well is to identify the indicators you will use, understand them, and then practice using a demo account. Another approach of trading divergencies is using the Relative Strength Indicator (RSI). For starters, this indicator is one of the most popular indicators in the world today.

Ideally, traders want confirmation to enter trades and while in trades. If the price is moving up, they want their indicators to signal that the price move is likely to continue. Divergence is when the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator, or is moving contrary to other data. Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction. Price action has a different important in forex trading market, this market has a great usage of trend system and in it https://forexhero.info/trading-212-profile-and-safety/ plays a great role. You are now looking at the 10-minute chart of Netflix from Aug 16-23, 2016.

Connect the Highs

Strong momentum is exhibited by a steep slope and a long price swing. Weak momentum is seen with a shallow slope and short price swing. Divergence is one of the common uses of many technical indicators, primarily the oscillators. Positive divergence indicates a move higher in the price of the asset is possible. Negative divergence signals that a move lower in the asset is possible. Divergence signals tend to be more accurate on the longer time frames.

• Similarly, a bearish divergence forms when the price of an asset forms a higher high while the MACD forms a lower high.
• When there is a divergence in the RSI (Relative Strength Index) indicator, this may indicate a possible trend reversal.
• The forex market is all about timing your trades well.
• The signal comes when the direction of the price action and the direction of the SO are different.

When the price rolls back, and the first bar closes in the green zone, we exit the short and take the profit. Let us test the divergence trading strategy in the same case where we traded with the MACD. The OBV measures the change in trading volume and adds or subtracts it from the previous value. The trading volume is added to the previous value if the price closes higher than the previous day.

Top indicators to spot Divergences

The signal comes when the direction of the price action and the direction of the SO are different. There are two types of divergence on the chart – bullish and bearish. The arrows are showing that the three lows, which are going down on the price chart, correspond to the lows, which are going up, on the RSI indicator chart.

For bullish divergence, we look to connect lows on the price action and lows on the indicator as well. If a higher time frame has divergence, the likelihood of a trend reversal is higher. Basically the higher the time frame, the more powerful as you can see in this example of the EURUSD. Also, the likelihood of a trend reversal increases if double or even triple divergence is spotted. In Elliott Waves’ terms, this is explained by the divergence between Wave 3 and 5 of a bigger Wave 3. And then the divergence between bigger Wave 3 and 5.

What Is the Best Divergence Trading Strategy?

The oscillators used for this strategy are found on the MT4 or MT5 platforms. The RSI (Relative Strength Index) is another popular indicator that is used to identify whether a security is overbought and oversold. It essentially calculates the average gains and losses over a certain period, so that the trader can see whether the current price has gone out of its normal, stable range. As you may have gathered, divergence can be found with a number of different indicators. There are a few differences in spotting divergence based on which indicator you’re using, so let’s walk through some of the major ones to make sure you’re ready to go.

Simply draw an imaginary vertical line from the price to the indicator, to rapidly spot the corresponding high points. Using the Moving Average Convergence Divergence Indicator (MACD) is a good place for you to begin your analysis. Like the Awesome Oscillator mentioned above, the MACD focuses on using averages from multiple different time periods. Price action always gives the most up to date information. The interpretation of price is an art and not an easy task.