Avoiding Divergence Drawdown
The easiest way to avoid divergence drawdown is to look at the resistance level for the currency pairing you are tracking. While you might be tempted to set up your take-profit point right at the top of the wave, you might think twice about it. If you see a double top, then a reversal might be upon you. In this case, it might be best to set up your exit point slightly below that mark. Even 5 pips can make a difference.
Another important way in which you can avoid drawdown is to anticipate it. You can tell a drawdown is on the horizon where there is a high volume of trading. If you see that there is a large number of trades happening at one time, you might be keen to keep an eye. If you see that the price has leveled off, sell immediately. The sooner you can liquidate your position, the greater the profit you will make. This is important as it will enable you to make a reasonable profit rather than see it get zapped by the sudden flood of stops. While this depends on your reaction time, it’s usually a good way of avoiding your profits being zapped altogether.
Lastly, a good way to avoid drawdowns is to play it safe. If you liquidate your position well before the trend reverses, then you might consider re-entering the play, except this time with a much tighter position, say a 1:1 risk to reward ratio, just to be on the safe side.
How to Identify the Right Divergence Setups
Identifying divergence setups can be tricky. Thus far, we have gone over the main points that are needed in order to properly determine a potential divergence setup. So, it’s important to go over the possible false signals that you may encounter when researching a setup.
The first false signal to watch out for is a trendline that does not figure to intersect the resistance or support level. So, you may have double or even triple tops and bottoms but no trendline to intersect. Now, you might be tempted to think that there might be a reversal, for instance, when looking for an entry point. However, you may find that a breakthrough is much likelier in a situation such as this.
Another false signal to watch out for is a trendline that is moving sideways. This is a very dangerous point to get into. If you are not careful, you might end up getting into a trade that will leave you missing out. When you have a sideways trendline, always be on the lookout for the candlesticks. If you see that the candlesticks are point toward a downturn, then be ready to exit. In this case, you may set up at a very tight stop and profit point, say, 10 pips either way. This is the type of setup in which you are looking to make a quick profit and leave.
Lastly, another false signal is when you do not see a clear trend. You may have double or triple tops and bottoms, but no clearly define trendline. In this case, the trendline may look like a wave or may have very sharps spikes and dips. This could be the result of an increased level of trading activity. It may just indicate that stock investors, for instance, are moving into FOREX as a means of getting away from stocks for a while. So, please try to avoid using the just tops and bottoms as a means of guiding your setup. You need to keep an eye on the trendline. Otherwise, you may enter a deal based on a false signal. While you may get lucky, the likelihood is just as great for you to lose.