In the analysis of the foreign exchange market, one of the most important and most used terms is divergence. When an asset’s price moves in the opposite direction of its indicator, forex divergence appears. It is considered to be a low risk way for selling near the top and for buying near the bottom of a trend, but it can also help you define an optimal exit point of some position. To see how forex divergence works, just keep reading this article!
Forex Divergence | Regular Divergences
First, it’s important to highlight that there are two main types of divergences: regular and hidden. A regular divergence is mostly a sign of a trend reversal. For example, if we have a price that’s at its lower low, and the oscillator shows higher lows, this is regular bullish divergence. This situation is quite common when a downwards trend is going to end. When a second bottom is established, and if the oscillator stays still, the price will probably go up.
On the other hand, if an oscillator is at a lower high, and the price is at a higher high, we have regular bearish divergence. This is a common thing when we have an uptrend. Logically, if the price makes its second high, and the oscillator makes a lower high, the price is about to drop. We can conclude that the areas where prices stop and reverse are the best to look for. But what about the other type of forex divergence, hidden divergence? Read on and learn everything about it!
Forex Divergence | Hidden Divergences
Besides looking for a trend reversal, with forex divergences we can also notice a continuation of a trend. These divergences are called hidden divergences. If we have a price at a higher low, and if the oscillator is showing a lower low, we have a hidden bullish divergence. The trend is usually going up. Hidden bearish divergence appears at the price’s lower high and the oscillator’s higher high, with a trend that’s going down.
However, it’s important to keep in mind that forex divergence is usually linked with oscillators that take a lot of elements into consideration. In other words, we advise you to learn how these Indicators work in order to learn all you need to learn about dealing with forex divergence in a proper manner.
Forex Divergence | Conclusion
Forex divergence essentially provides you with an easy way to sell and buy at the right time. These phenomena will show you how to react to price movements in a proper manner, and all you have to do is to learn how to interpret them. We have to mention that we usually think of forex divergence as an indicator of low-risk actions, so we would definitely recommend this analytical tool to anyone. It’s an easy way to upgrade you trading skills, so don’t wait and invest some time into learning them. It will be well worth it.