Divergence and Confluence
Confluence occurs when two or more indicators meet each other at some point in a chart. This means that you need to look at various indicators to ensure that you have the right setup in mind. To do this type of analysis, the most common means is through the MACD.
In this type of strategy, you need to use the moving average of the currency pair you are trading. In this regard, the MACD will enable you to visualize the moving average of the price in question in addition to the price action. If you have both of these indicators moving together toward a point of intersection, then you have confluence. When they are moving away from one another, then you have divergence. Both of these scenarios are useful in helping you spot where your next move may lie.
Let’s look at confluence first.
Confluence occurs when you have a price action trendline and moving average getting closer to one another. In the event that you have a bearish trendline and a bullish moving average, then you are seeing a potential reversal in trend. The reversal occurs at the point in which the two lines intersect. The point in which they ought to intersect should be somewhere at or near the support level. Once the lines have intersected with one another, they will begin to move away. It’s important to watch out for the point in which they may hit the support level as the absences of clear bottoms may be more indicative of a breakthrough rather than a reversal in trend.
Now, let’s look at divergence.
In the event of divergence, you have both the price action trendline and the moving average creating a gap. For instance, you have a bearish moving average and a bullish price action trendline. What this indicates is that the price action is slowing down. As such, it is a warning to avoid getting in at the wider points of the gap. If anything, you may want to look at liquidating your positions as prices may soon begin to level off. This would serve as a clear indication that it’s time to sell. If the price action is getting closer to your take-profit level, just make sure you don’t have any sudden drawdowns.
Using Bollinger Bands in Divergence Trading
Bollinger Bands is a trading strategy in which you have price action moving within a predictable band or range. This means that the price moves up to a resistance level and then falls back down to a support level before rising back up again. This type of trading is rather predictable and a great way of making steady earnings. This may not be the sexiest way of making money, but it sure is effective.
When using Bollinger Bands, the moving average is your best tool. You can track the trendline for the moving average in such a way that you can clearly determine the resistance and support levels. Consequently, divergence helps you to spot the exact points at which you ought to get in and the point at which you need to exit.
In short, Bollinger Bands set up both resistance and support levels based on successive hits on resistance and support levels. However, to use this strategy correctly, you need to identify at least three hits on both the support and resistance levels without any sign of breakout or breakthrough.
Additionally, you need to use a longer timeframe, say 48 hours, to truly identify this pattern. While this pattern is relatively common, especially among correlated pairs, it is important to note that the price action trendline will move up or down based on the moving average trend. So, your goal is to identify the exact point in which the reversal in trend will occur. At that point, you exit the trade, collect your profits, and then wait for the price action to move back down close to the resistance level and then back up again.
As stated earlier, Bollinger Bands are not the most exciting way of making a profit, but it allows you to make predictable earnings that you can count on to help you reach your investment goals.