Introduction To And Rules Of Divergence
Divergence is one of the most common indicators which is used to guide investment decisions. When you are able to spot divergence clearly, you can pick up on the overall direction a trend is heading. In this manner, you can anticipate, within a reasonable margin, the potential reversal in trend.
When you go about using divergence as a means of setting up your trading strategy, it’s important to note that you can profit from either a bullish or bearish trend. It all depends on how soon you are able to spot the potential reversal, as indicated by the trend itself.
That is why this chapter is focused on using divergence as a strategy so that you can set up your deals quickly and effectively. The main thing to keep in mind is that you need to spot the divergence so that you can take advantage of it.
In most books on trading, you’ll find that divergence is determined by the interaction between trend and the moving average. This technique is commonly referred to as MACD (moving average convergence divergence).
In the MACD strategy, what you are essentially doing is spotting the points in which the moving average is going to intersect with the trendline. While this technique is highly effective, it may lead to possible false signals as the moving average is just one measure of what you can expect as a means of calculating the overall trend pattern of the currency pair you are tracking.
In this chapter, we are going to use Price Action as a means of determining divergence so that you can have a clear and accurate picture of when reversals are about to take place. You will find that this is the most effective way of determining divergence so that you can set up entry and exit points. Best of all, you are not using any additional measures beyond the most reliable indicator there is price.
When going about divergence as a strategy, there are some helpful tips to keep in mind:
- Make sure that highs and higher than the previous high and that lows are lower than the previous low. This means that when spotting divergence, your highs need to break out, and the lows need to break through. When you spot there, you’ll be able to get the right tracking for the divergence you seek. Double tops and bottoms are the best way for you to spot this.
- Tops and bottoms need to be in successive order. This means that you must spot sharp dips and spikes. It won’t work if you have smaller dips and spikes; all you might be seeing is an increased amount of trading volume.
- Ensure that the trendline is on the right path to intersect with the tops or bottoms you are looking at. Otherwise, you might be getting in too soon or too late. This is important as the reversal will take place at the point where the trendline intersects with a major top or major bottom.
- Also, please ensure that you look at different timeframes. If you focus only on tone timeframe, you’ll be missing the entire picture. Please bear in mind that anything can happen in a short time period. So, it’s always best to go back further in time to confirm your strategy. That way, you can be reasonably sure that you are on the right path.