How Divergence can help identify high quality trade setups
In this weekly video:
00:29 – Divergence can help identify great trade setups
01:10 – There are so many ways to trade
01:35 – What is Divergence?
02:44 – 2 types of Divergence – Standard and Hidden Divergence
03:12 – You cannot take divergence signals by themselves
04:18 – Indicators are just an aid to alert you
05:02 – Contact me if you need more help
I'm going to talk about divergence and how spotting divergence can help you identify high-probability trade setups. Let's get into that and more right now.
Hi, Forex traders. It's Andrew Mitchem here, the owner of The Forex Trading Coach. This week, we're into video and podcast number 264.
Divergence can help identify great trade setups
I'm going to help you understand and explain to you all about divergence and how it can really help identify high-probability trade setups. It really is this amazing occurrence that you see on your charts, and it can really help identify great setups, but like all technical analysis, you cannot use divergence just by itself. You have to basically blend it with a really defined group of other indicators and tools to help you become a good trader and help you have a good strategy, but in this video, I want to talk just about divergence because it really is very powerful if you understand how to use it correctly.
There are so many ways to trade
As traders, there are unlimited ways of trading, and really, all we're trying to do is add as many factors, as many occurrences together showing at the same time to say, “Hey, this is a high-probability setup. Technically, this is looking good. It has all these things, A, B, C, D, E, F, G, in its favour. Yes, it's looking good. Let's take the trade.”
There are so many ways to trade
What does divergence do? Well, divergence occurs on your charts, and mostly, you see it when you're using oscillators like RSI, or stochastic, or MACD. I use it only on stochastic myself, but it can be used on a variety of oscillating indicators, and what it's doing is showing us a difference between what the indicator is identifying should be happening in the price and what the price is actually really doing. When you get a conflict, say you get the indicator going one way and the price actually going the other way, so it's that conflict, which creates the divergence, and when you, for example, get the price making higher highs, and the indicator is suggesting the highs, and the indicator are going lower, that gives us a higher probability chance of a reversal from that uptrend.
Of course, you need candle patterns and you need it to occur in the right part of the chart. That's all additional material that I cover in depth in my course, but just understanding divergence and saying that a price is going up, the indicator is going down, the likelihood is that the price potentially now should start to reverse.
2 types of Divergence – Standard and Hidden Divergence
So you have what you call “Standard Divergence”, positive and negative. I also use something that's called “Hidden Divergence,” so hidden positive divergence and hidden negative divergence. They help me identify continuation patterns far better. Again, I cover all that in detail if you'd like to know more in the course, but you use divergence with a number of other factors, and it really can help identify high-probability setups.
You cannot take divergence signals by themselves
As I mentioned at the beginning, you cannot use divergence just by itself. Don't just go out there looking for divergence and go, “Here's divergence on my charts. Therefore, I'm taking a sell trade or a buy trade.” You can't do that. You have to blend it in with your overall big bucket basically of technical knowledge and put all these things together, but once you understand divergence and the difference between Standard Divergence and Hidden Divergence, it's a great way of identifying likely changes in direction from reversing a big uptrend, or reversing a big downtrend, or continuation patterns, which is more when you can have an uptrend and a pullback, and then the uptrend is likely to continue again or reverse with the sell trade.
I hope that helps. Have a look about divergence. Get to understand it. Put it on your charts if you … or put an oscillator on your charts and see divergence showing. I've got a software that identifies it all for me and my clients anyway across all currency pairs or timeframes, which makes life a lot easier, but you can still see it with the eye in real time. It's just like most of these things.
Indicators are just an aid to alert you
Indicators are just an aide. They're not to say you have to buy or sell here. They're an aide to say, “Hey, look. There's something showing on this chart. It's a candle pattern or it's a divergence. What else is there on the chart like where in the chart are we showing this pattern? What part of the chart are we in? Do we have a number of other factors together? Have we batched it, support resistance, or a round number? Do we have the pivot point in our favour?”
All these other things need to be added to divergence, but when they all occur together, you have yourself a very high-probability trade setup that can really help increase your win rate, your profitability, you're getting high reward-to-risk rate. Everything that we're looking for to be successful traders.
Contact me if you need more help
If you'd like more details about how I can help you and all about my Forex coaching course that's been running nearly nine years now, help thousands of traders throughout all parts of the world, if you'd like more details, click on the link below this video or send me an email to [email protected]
I'll see you this time next week with more trading tips and information. Bye for now.