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.
First is the regular bullish divergence. This takes place when the currency pair has lower lows but the oscillator has higher lows. As a reversal indicator, it shows that the downtrend made by the previous lower lows in price is about to be reversed and that an uptrend is ready to take place.
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.
The third kind is known as the hidden bullish divergence. It is useful in predicting a possible continuation of the ongoing uptrend. This happens as price makes higher lows while stochastic draws lower lows, indicating that buyers have more momentum to push the pair higher.
The fourth kind is the hidden bearish divergence. This takes place when price makes lower highs but the oscillator sketches higher highs. This also predicts a continuation since price makes lower highs during a downtrend but the creation of higher highs by stochastic means that sellers have more momentum 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.
First is the regular bullish divergence. This takes place when the currency pair has lower lows but the oscillator has higher lows. As a reversal indicator, it shows that the downtrend made by the previous lower lows in price is about to be reversed and that an uptrend is ready to take place.
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.
The third kind is known as the hidden bullish divergence. It is useful in predicting a possible continuation of the ongoing uptrend. This happens as price makes higher lows while stochastic draws lower lows, indicating that buyers have more momentum to push the pair higher.
The fourth kind is the hidden bearish divergence. This takes place when price makes lower highs but the oscillator sketches higher highs. This also predicts a continuation since price makes lower highs during a downtrend but the creation of higher highs by stochastic means that sellers have more momentum 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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