Divergence on oscillators: worth trusting
Around the use of divergence on indicators like "oscillator" There are different opinions. Some traders consider the divergence to be almost a 100% signal to enter the market. Some, on the contrary, consider the divergence on oscillators to be absolutely useless. In fact, there is some truth in both statements.
Classical divergence by practical example
The principle of classical divergence is a discrepancy between the oscillator readings and the current direction of the currency pair.
As an example, let's consider the signals of one of the most popular oscillators - the standard indicator of the MetaTrader 4 trading platform MACD on the chart of the currency pair USD/JPY, daily timeframe.
The emergence of divergence
The first signal marked in dark red on the chart (November and December 2006) is a classic example of a "bullish" divergence - the price shows a decrease with each peak lower than the previous one, while the MACD histogram shows an upward movement.
If we stick to the classical theory of divergence, then Such a difference in the direction of price movement and oscillator readings is an indication of an impending price correctionAnd that's exactly what happened in this case: it started rising in early December, and it lasted until the second divergence was completed.
At the same time, the divergence was so strong that we can see the formation of some mini-divergence, marked on the chart by a dotted line of dark red color, which can be regarded as a confirmation of the buy signal.
Trade
The second divergence, which appeared on the price chart in mid-December 2006 - mid-January 2007 and is marked in dark blue, on the contrary, cannot be attributed to the classical example.
Certainly there is a noticeable difference between the lower highs of the MACD histogram, but the price change itself can be characterized as a prolonged flat upward movement, rather than the formation of a higher peak. That is, the second divergence signal is not as clearly expressed as the first one. The second divergence was less profitable than the first and carried more risks.
Correct Use of Divergence Signals on Oscillators
- How can you use divergence signals in trading, increasing profits and reducing risks to a minimum?
- First of all, it is worth paying attention to the time interval used. Divergence signals can be used on all timeframesBut it is worth bearing in mind that oscillators give more accurate signals on higher timeframes.
- Of course, it is worth using a stop loss, taking into account the rules of its placement, so that the order is not closed on the stop in the event of any minor fluctuations in price.
- If the trader recognized the divergence signal correctly, it should be used to build up the position to the desired scale. If the momentum is strong enough and persists for a long time - you can hold the position open until the start of a corrective pullback, moving the stop loss to Breakeven.
- If the price moves without any definite direction, the divergence signal should be ignored and look for other opportunities to enter the market.
By analyzing the price charts of the major currency pairs, you can find lots of examples proving that the divergence signals on the oscillators can, to some extent, be trusted, and their competent use can be one of the elements for effective and profitable trading on the market.