Using divergences to predict price action is an advanced trading technique, but the bottom line is that these are used to identify continuations or reversals in trends. In particular, divergence traders watch the lows and highs of price along with the lows and highs of the oscillator they are using. Below are four kinds of divergences in forex.
The first kind is called the regular bullish divergence, often used to identify a reversal in the ongoing downtrend. This happens because price is making lower lows but the oscillator is making higher lows, indicating that buyers have gathered enough energy to push the pair above its current selloff.
Second is the regular bearish divergence. Opposite to the regular bullish divergence, this signals that a downtrend is about to take place. This reversal signal happens when the currency pair makes higher highs but the oscillator shows lower highs, indicating a possible downtrend.
Third is the hidden bullish divergence. This takes place when the currency pair draws higher lows while the oscillator sketches lower lows. It is used in predicting a possible continuation of the current trend. Price has higher lows during and uptrend and a lower dip by the oscillator reflects more buying energy to take the pair higher.
Fourth is the hidden bearish divergence. This happens when the currency pair makes lower highs while the oscillator draws higher highs. It is also used in predicting a potential continuation of the ongoing downtrend. Price makes lower highs during a downtrend but the larger pop in the oscillator means more pressure to push the pair down.
Of course there are differing conventions involved in pinpointing divergences, as some traders prefer stricter rules while others are more relaxed. In particular, some traders count highs in the oscillator as those going above 80 and lows as those going below 20.
The first kind is called the regular bullish divergence, often used to identify a reversal in the ongoing downtrend. This happens because price is making lower lows but the oscillator is making higher lows, indicating that buyers have gathered enough energy to push the pair above its current selloff.
Second is the regular bearish divergence. Opposite to the regular bullish divergence, this signals that a downtrend is about to take place. This reversal signal happens when the currency pair makes higher highs but the oscillator shows lower highs, indicating a possible downtrend.
Third is the hidden bullish divergence. This takes place when the currency pair draws higher lows while the oscillator sketches lower lows. It is used in predicting a possible continuation of the current trend. Price has higher lows during and uptrend and a lower dip by the oscillator reflects more buying energy to take the pair higher.
Fourth is the hidden bearish divergence. This happens when the currency pair makes lower highs while the oscillator draws higher highs. It is also used in predicting a potential continuation of the ongoing downtrend. Price makes lower highs during a downtrend but the larger pop in the oscillator means more pressure to push the pair down.
Of course there are differing conventions involved in pinpointing divergences, as some traders prefer stricter rules while others are more relaxed. In particular, some traders count highs in the oscillator as those going above 80 and lows as those going below 20.
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