Today I will talk about how to trade divergence correctly. I do not pretend to be the truth and share only those practices that help me earn money in the Forex market. Before we move on to a detailed discussion, I would like to acquaint you with my view of the market and tell you about those things, the understanding and successful application of which will allow you to become profitable traders.
What is the Market like?
Initially, the exchange was created to buy and sell goods, food, raw materials.
Then there were speculators making transactions with only one goal – to earn on the difference between buying and selling. The introduction of futures (a contract for the supply of goods at a predetermined price and at a certain time) facilitated the conduct of trading operations. First, they bought futures from direct producers and sold them to consumers, then they made deals with each other. And the more there were those who wanted to gain fame in this field, the more liquid the market became. It got to the point that all transactions on the exchange were carried out only between speculators. Today, speculators began to be called traders, however, the specifics of earnings did not change at all – they still try to buy something completely unnecessary for them, so that they can then resell it at a better price.
So we come to the main question: ” How to do this? ”
There are a number of methods for determining pivot points and all of them are based on the search for patterns or imbalance.
In this case, we will operate with such concepts as overbought or oversold. Because Since overbought is most often accompanied by the rapid growth of an asset, it can be recognized on the charts of trading instruments using oscillators. I recommend using an indicator developed by Bill Williams – Awesome Oscillator (AO). I liked him the most, because without any difficulty, within a few seconds you can identify the occurrence of divergence.
The key point: when an asset is overbought, the asset price is higher than this can be explained with the help of fundamental factors. And divergence is a discrepancy between the price indicator and the oscillator. Those. the next time the price of hi / low is updated, the hi / low indicator does not update.
Thus, during an abundance of positive news, the price of an asset can increase significantly, but at the same time it will not be overbought and the emerging divergences will not be worked out for a long time. And then, instead of a deep pullback, divergence will be discharged in a narrow horizontal channel and growth will continue.
How then to trade?
In addition to using technical analysis, one should pay attention to fundamental factors. For example, before the start of the stimulus policy by the ECB and the curtailment of the quantitative easing program by the Fed, the euro strengthened against the dollar. During important news, they updated hi once again, gathered sellers ‘stops, buyers’ punches, formed a bearish divergence and collapsed the euro. Then the market ignored several bullish divergences that appeared in those places where there were no signs of oversold because the cost of the euro was fully consistent with fundamental factors (raising the Fed rate and launching the ECB printing press).
An additional important factor in favor of working out divergence will be its formation near a strong level or the appearance of the “Wedge” pattern. If we trade on H1, then the level should be on TF H4 or D1.
For example, in the figure below, the eurodollar turned around near the mirror level of 1.1085 after a bull divergence was formed on the four-hour chart.
How to increase the number of profitable transactions and where to place orders to limit losses?
It is best to wait until the 3rd extremum. This pattern is known to us under the name “3 Indians.” Stop-loss is placed a few points above it or according to the rules of this pattern. We fix the profit at the intersection of the zero marks or according to the rules of this pattern. I draw your attention to the fact that the transaction must be transferred to b / y after the discharge of divergence because of The chances of completing the rollback and resuming the initial movement increase.
A position can be recruited in stages as new extreme points emerge. We set one common stop, which we place behind the strong level identified on the higher timeframe.
Why do divergences work?
Any trend ends sooner or later. Sometime after the price increase, there comes a moment when the upward movement gradually fades: the number of people wishing to take profits and open sales increases, buyers begin to pull their stops as close to the current price as possible. Now supply prevails over demand and the very first bearish impulse breaks bullish stops – an avalanche-like closing of long positions begins, which provokes a new wave of sales. As a rule, after the discharge of divergence, the process stops, but in some cases, with the support of fundamental factors, the relaxation of divergence is the beginning of a new trend.
Here is one of the most effective ways to enter the stage of the trend.
If you have any questions, feel free to ask them in the comment section. I will be happy to answer any of them.