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Divergence trading is a strategy based on divergence phenomena between price and technical indicators. When price makes new high but indicator doesn't (bearish divergence), or price makes new low but indicator doesn't (bullish divergence), it signals potential trend reversal. Common indicators include MACD, RSI, Stochastic, etc.
Bullish divergence: Price makes new low but indicator doesn't, signals upside
Bearish divergence: Price makes new high but indicator doesn't, signals downside
Indicator selection: Commonly use momentum indicators like MACD, RSI, Stochastic
Confirmation signal: Wait for price action to confirm divergence signal
Multiple divergence: Consecutive divergence signals are more reliable
Divergence trading applies to all markets and timeframes, in forex trading can be used to identify trend reversal opportunities. The strategy is particularly suitable for finding reversal points at trend ends. Can be used on larger timeframes like daily and 4-hour charts for more reliable signals.
Can identify trend reversals early; provides clear trading signals; can enter at trend tops or bottoms; risk-reward ratio usually good; applicable to various market environments.
Divergence signals may appear early, trend may continue; divergence may fail in strong trends; requires patience to wait for confirmation; may have false divergences; different indicators may give different signals.
When using divergence trading strategy, note: wait for price action to confirm divergence signal; don't trade against strong trends; set reasonable stops; combine with other technical tools for verification; note difference between hidden and regular divergence; finding divergence on larger timeframes is more reliable; don't enter too early, wait for clear reversal signals.
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