It’s now time to use those Jedi divergence mind tricks to push the markets to give you some pips!
In this session, we’ll show you some examples of when price and oscillator movements diverged.
How to Trade a Regular Divergence
First and foremost, consider regular divergence.
The USD/CHF daily chart is shown below.
The dropping trend line indicates that USD/CHF has been in a downtrend.
However, there are indicators that the decline may be ending.
While the price has made lower lows, the Stochastic (our preferred indicator) has made a higher low.
Is the reversal now over? Is it time to buy?
If you had said yes to the last question, you would have found yourself in the midst of the Caribbean, sipping margaritas while knee-deep in your pip wins!
The divergence between the Stochastic and price action turned out to be an excellent purchase signal.
Price burst through the falling trend line and began to rise.
If you had bought around the bottom, you could have profited almost a thousand pips as the pair continued to rise in the months that followed.
Can you see why getting in on the trend early is so beneficial?
Before we go any farther, did you see the tweezer bottoms on the second low?
Keep an eye out for additional indicators of a reversal. This will provide additional evidence that a trend is ending, giving you even more cause to believe in the power of divergences!
How to Trade a Hidden Divergence
Next, consider an example of a hidden divergence.
Let’s look at the USD/CHF daily chart once again.
We can observe that the pair has been in a downward trend. Take note of how the price has produced a lower high while the stochastic has printed higher highs.
This is a hidden bearish divergence, according to our notes!
What shall we do now? Is it time to re-join the trend? If you’re not sure, you can always sit back and observe from the sidelines.
The trend has continued!
Price bounced off the trend line and eventually fell about 2,000 pips!
Imagine if you had noticed the divergence and interpreted it as a possible signal for the trend to continue.