Divergences and convergences are a true ally of every trader using technical analysis on the Forex market. These are simple anticipatory signals that allow you to plan in advance for a trend reversal and to filter out a false signal. In this post, we will take a closer look At anything relevant to the subject of convergence and divergence.
What is Forex divergence?
The definition of
divergence in Forex is a discrepancy in the readings of the highs and lows of the
price chart with the readings of a technical indicator. For example, the price
of an asset may go up for a long time, but the oscillator curve will
move towards the oversold zone. The reverse is also true.
Let's
consider an example of Forex divergence on the EURUSD chart .
The chart shows that the next price peak, marked with
a blue line, is higher than the previous one. At the same time, the MACD
indicator indicates downward changes on the chart. You can see that his
histogram is reaching zero. In reality, the signal is realized that there is a
price reversal. Running a little ahead, I'm going to claim that the divergence
considered is an easy, bearish classic. It's called negative, too.
Although diversion is a very simple signal in itself,
traders manage to get lost in the "three pines." The root of this
problem is a wide range of names and typologies of divergences.
In total, these signals are divided by traders into:
1. classic (simple) / hidden / extended
2. bullish / bearish
3. negative / positive
4. normal / reverse
5. divergence / convergence
As many as five subtypes! Even for a specialist
to get lost in such a variety, it's not shocking. In reality, everything is a
lot simpler than it seems. Let's get a fat point and understand the
"zoo" of signals.
Double top and double bottom
In order to figure it out on the shelves, you need to
consider how the diver is determined. Despite the type, all signals follow
three principles:
1. The most important-"Double bottom" or
Double top" pattern is produced on the price chart.
In other words, the graph should have two distinct
peaks pointing up or down.
Important! Important! The development of peaks is
expected to be part of the trend movement.
There is no double top visible in the chart above. The
peaks are not well expressed. Therefore we cannot speak of a sign of
divergence.
2. Every kind of divergence is plotted only on the
peaks or only on the lows of the price chart and indicator.
The chart above shows the correct interpretation of
the signal. The line connects the local highs of the double top and the
indicator.
The above chart is an
example of how a diver is being misinterpreted. There is an incorrect
distinction between the price peaks and the indicator lows.
3. The price peaks and
the indicator are below each other
The definition of
divergence in Forex is a discrepancy in the readings of the highs and lows of the
price chart with the readings of a technical indicator. For example, the price
of an asset may go up for a long time, but the oscillator curve will
move towards the oversold zone. The reverse is also true.
Let's
consider an example of Forex divergence on the EURUSD chart .
The chart shows that the next price peak, marked with a blue line, is higher than the previous one. At the same time, the MACD indicator indicates downward changes on the chart. You can see that his histogram is reaching zero. In reality, the signal is realized that there is a price reversal. Running a little ahead, I'm going to claim that the divergence considered is an easy, bearish classic. It's called negative, too.
Although diversion is a very simple signal in itself, traders manage to get lost in the "three pines." The root of this problem is a wide range of names and typologies of divergences.
In total, these signals are divided by traders into:
1. classic (simple) / hidden / extended
2. bullish / bearish
3. negative / positive
4. normal / reverse
5. divergence / convergence
As many as five subtypes! Even for a specialist
to get lost in such a variety, it's not shocking. In reality, everything is a
lot simpler than it seems. Let's get a fat point and understand the
"zoo" of signals.
Double top and double bottom
In order to figure it out on the shelves, you need to
consider how the diver is determined. Despite the type, all signals follow
three principles:
1. The most important-"Double bottom" or
Double top" pattern is produced on the price chart.
In other words, the graph should have two distinct peaks pointing up or down.
Important! Important! The development of peaks is
expected to be part of the trend movement.
There is no double top visible in the chart above. The peaks are not well expressed. Therefore we cannot speak of a sign of divergence.
2. Every kind of divergence is plotted only on the peaks or only on the lows of the price chart and indicator.
The chart above shows the correct interpretation of
the signal. The line connects the local highs of the double top and the
indicator.
The above chart is an example of how a diver is being misinterpreted. There is an incorrect distinction between the price peaks and the indicator lows.
3. The price peaks and
the indicator are below each other
The chart above shows the correct variance
analysis. The indicator highs coincide with the double top highs.
