Divergence analysis: a powerful weapon for any trader
Divergence is quite a popular type of trading on the market among professional currency traders. It is considered to be the destiny of professionals, and it is not recommended for newcomers to get involved in this topic. However, we will try to tell you about this trading technique in simple language understandable even to a beginner.
What is important when analyzing divergences?
Nowadays there is more than one divergence indicator, but even the use of such analyzers will not give you the efficiency in trading if you do not have at least a general idea about such a notion as the divergence. In general, the sense of both divergence and convergence is divergence of the oscillator from the price chart. Usually the following indicators are used for the divergence analysis: MACD, slow Stochastic, OsMA, RSI, CCI and the like.
We will try to disclose in this review most of the techniques of the so-called diverters, the use of oscillators in divergence and perhaps the most important issue - the importance of the indicator settings and the chart period of currency instrumentsThe divergence indicator that you use in trading. In fact, this is what scares many traders, the indicator you use to determine the divergence can show absolutely different signals with different settings. What to say about the time interval you have chosen. So, let's start with the classification of the divergence methods used in trading.
Classic or Right Divergence
So, we consider any divergence of maximums or minimums of the price with maximums and minimums of the oscillator used in trading to be a divergence. В correct divergence or the so-called "class A divergence the following is taken into account: if the price makes higher highs (peaks), and the oscillator makes lower ones (we can say that it lacks strength) - it means a bearish divergence and tells about a bullish trend reversal is imminent.
If the price is making lower and lower lows and the oscillator is making higher lows. This indicates a bullish divergence and tells us that a bearish trend reversal is imminent.
As you can see, there is nothing difficult about identifying the main and strongest divergence Class A, no. Everything is very simple and straightforward. The logic of application is quite clear and should be effective, because any indicator is a smoother display of currency fluctuations, based on the history of currency instrument movements preceding this moment. Actually, the divergence simply helps to determine what is quite difficult to notice to the human eye and enter the market maximizing the upcoming movement.
Class B Divergence
Let's look at the next type of divergence, the so-called "B-class". The following rules are used to determine the assumed trend: if the price makes a double top and the oscillator has a double top so that the next peak is lower than the previous one, we have a signal of a bearish divergence and we expect the imminent start of a bearish trend. If the price forms a double bottom with its minima, and the indicator has a second peak, which makes the bottom higher than the previous one - we have a bullish divergence signal and expect Beginning of a bullish trend.
This type of divergence is considered slightly weaker than the class A divergenceBut you should not ignore it. Quite often it determines the beginning of a good trend. As you have already noticed, any divergence is a pullback (trend reversal) signal, unlike a convergence, which signals its continuation. So let's look at the final type of divergence, a class C divergence.
Class C Divergence
It counts the weakest divergence and it is recommended to apply it in rare cases when you simply do not have other signals. In our opinion, this class of divergence is quite strong and should not be forgotten. It is possible that the knowledge of the trading volumes of the currency instrument should be used to confirm the signal. But once again, the C-class divergence is a quite clear signal and it should not be ignored in your own trading. It is actually determined quite simply.
Bearish divergence: the price reports a new, higher high; the oscillator forms a double top with approximately equal peaks. We look at the positions in short.
Bullish divergence: the price makes a lower low than the previous one; the oscillator forms a double flat bottom. We consider the position in long.
Oscillator settings and timeframe
Here no one will tell you the right answer. Trading on divergences, even though it is close to any fundamental data - the subtle following of the price and its formations, is still a method of probability. Of course it points you to some "cataclysms" of price, which you can use in your own trading, but it cannot explain why the price should change its course. Therefore, as with any indicator system, you will have to independently test and "fit" the methodology to historical dataThat is, optimize the TF and oscillator settings for the story.
It is important to note that trading using the divergence techniques is as close to the price as possible and is undoubtedly a powerful weapon for any professional trader in its pure form or in complex with the main strategy.