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.
The second kind is known as the regular bearish divergence. The opposite of the bullish divergence, it is used to signal a reversal in the ongoing uptrend. This takes place when price makes higher highs but the oscillator draws lower highs. This indicates that sellers have gathered enough energy to push the pair out of its current uptrend.
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.
Fourth is the hidden bearish divergence. This happens when the currency pair makes lower highs while the oscillator draws higher highs. It is also used in predicting a potential continuation of the ongoing downtrend. Price makes lower highs during a downtrend but the larger pop in the oscillator means more pressure to push the pair down.
There are some conventions when identifying divergences but this depends on how strict you are with price signals. Highs in the oscillator are typically marked as the peaks but stricter traders want the oscillator to be above 80 to be considered a high. On the other hand, lows are marked as troughs but stricter traders want it to be below 20 to be considered a low.
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.
The second kind is known as the regular bearish divergence. The opposite of the bullish divergence, it is used to signal a reversal in the ongoing uptrend. This takes place when price makes higher highs but the oscillator draws lower highs. This indicates that sellers have gathered enough energy to push the pair out of its current uptrend.
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.
Fourth is the hidden bearish divergence. This happens when the currency pair makes lower highs while the oscillator draws higher highs. It is also used in predicting a potential continuation of the ongoing downtrend. Price makes lower highs during a downtrend but the larger pop in the oscillator means more pressure to push the pair down.
There are some conventions when identifying divergences but this depends on how strict you are with price signals. Highs in the oscillator are typically marked as the peaks but stricter traders want the oscillator to be above 80 to be considered a high. On the other hand, lows are marked as troughs but stricter traders want it to be below 20 to be considered a low.
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