Divergence Patterns Forex
- Divergence patterns help reveal reversals
- There are regular divergence patterns and hidden divergence patterns
- Divergence helps identify MAs and trend lines
Divergence Chart Patterns – How Do They Work?
Divergence patterns offer traders a possible sign of the trend continuing or the trend reversing.
There are two types of divergence chart patterns:
- Regular divergence patterns: used to spot potential trend reversal
- Hidden divergence patterns: used to spot potential trend continuation
Each divergence chart pattern can be bullish or bearish.
The Forex divergence pattern can be seen on the price chart by adding a divergence indicator on the bottom of the price chart. The most commonly used divergence indicators are the MACD, RSI, CCI, AO, and stochastics (more information later on).
Regular Divergence Chart Patterns
Regular divergence chart patterns can be bullish or bearish. Regular divergence patterns indicate reversals. This is the most commonly known Forex divergence pattern and the divergence Forex meaning that most traders know.
Bullish regular divergence patterns reversals:
- Price confirms a higher high but the oscillator makes a lower high
- This occurs when price action is an uptrend
- The pattern suggests that a bearish reversal could take place now or soon
Bearish regular divergence patterns reversals:
- Price confirms a lower low but the oscillator makes a higher low
- This occurs when price action is a downtrend
- The pattern suggests that a bullish reversal could take place now or soon
Regular divergence patterns indicate that:
- The trend is losing its momentum
- Chances are that the trend is not sustainable anymore
- A reversal might take place now or sometime soon
As mentioned, a divergence pattern does not mean that a reversal will take place right away. The trend can continue for quite a while before the actual reversal appears.
Traders should therefore always treat it as an early signal when divergence patterns Forex appear. Also, multiple divergence patterns on one time frame or multiple divergence patterns on multiple time frames makes it more likely that a reversal will take place sooner.
Hidden Divergence Chart Patterns
Hidden divergence chart patterns can be bullish or bearish. Hidden divergences are called hidden because they are “hiding” in the trend.
Bullish hidden divergence chart pattern:
- Price confirms a lower high but the oscillator makes a lower low
- This occurs when price action is an uptrend
- The pattern suggests that an uptrend continuation could take place now or soon
Bearish hidden divergence chart pattern:
- Price confirms a higher high but the oscillator makes a lower high
- This occurs when price action is a downtrend
- The pattern suggests that a downtrend continuation could take place now or soon
Hidden divergence patterns indicate that:
- The correction is losing its momentum
- Chances are that the trend will continue
- A trend continuation might take place now or sometime soon
Hidden patterns indicate that the trend is not over. It also is an indication the trend is expected to continue now or sometime soon.
Hidden divergence chart patterns usually appear less often on the chart than regular divergence chart patterns.
Nonetheless, if they do appear, then a trend continuation could be expected on that price chart and time frame.
Divergence Forex Trading Patterns To Follow
Both regular and hidden divergence patterns can be seen on the chart by using a divergence indicator. For Forex divergence trading, most traders use indicators such as:
- The AO (Awesome Oscillator)
- The MACD
- The RSI (relative strength index)
- The CCI (commodity channel index)
- The stochastic oscillator
These five divergence patterns are probably considered to be the most common divergence indicators within the trading community. But undoubtedly, there are many more available that are not mentioned in this article.
Each divergence indicator works differently. But whether it’s the divergence Forex RSI or just the simple MACD, ultimately they have the same ability to show divergence patterns on any price chart on any time frame
Double divergence patterns or divergence patterns on multiple time frames increase the probability of a reversal taking place.
For trading purposes, however, divergence patterns and divergence indicators are best used in combination with other tools and indicators. This is a better approach than only relying on the divergence indicator itself.
Divergence Trading Strategy – What’s The Best One?
As mentioned in the last part, traders usually use divergence trading patterns in combination with other tools and indicators for Forex divergence trading. Divergence trading patterns play a role as part of a larger trading strategy, also divergence trading strategy.
Some traders will place a lot of emphasis on divergence patterns within their divergence Forex strategy, others will only give it a minor role.
Divergence patterns can used on all time frames and types of trading, whether traders are swing trading or Forex divergence scalping.
Traders can use multiple techniques to confirm and trade divergence patterns:
- Bounces at strong support and resistance zones
- Bounces after candlestick patterns emerge
- Breakouts with moving averages, trend lines, and fractals
Bounces At Strong Support And Resistance Zones
Traders can use support and resistance levels and indicators for finding high probability reversal spots. One of the best indicators is the Fibonacci tool, which offers key support and resistance levels on the price chart. Traders can place pending orders at the S&R levels in combination with the presence of divergence patterns.
Bounces After Candlestick Patterns Emerge
Once traders identify a key support and resistance zone, they can wait for candlestick patterns to emerge at the point of confluence. Rather than trading pending orders, traders can enter the market after a bounce has been confirmed via candlestick patterns.
Breakouts With Moving Averages, Trend Lines, And Fractals
Other key indicators for trend reversal are moving averages, trend lines, and fractals. Traders can trade breakouts using the moving averages and trend lines. Also, Fractal divergence patterns are a great way of trading the breakout.
What Did We Learn From This Guide On Divergence Patterns?
This guide explains the concept of both types of divergence chart patterns, which are regular and hidden divergence patterns. Regular divergence chart patterns indicate the potential end of the trend. Hidden divergence chart patterns indicate the potential continuation of the trend. The article then examines which divergence indicators can be used for spotting divergence patterns. Finally, the article discusses three methods on how traders are able to trade the divergence patterns.
Common Questions On How Divergence Patterns Help Indicate Reversals
What Is The Best Indicator To Show Divergence?
There are multiple indicators that work well with showing divergence patterns. There is no consensus among the trading community which is the best indicator to show divergence. However, many traders use indicators such as the AO (Awesome Oscillator), the MACD, the RSI (relative strength index), CCI (commodity channel index), and the stochastic oscillator. These 5 are probably considered to be the most common divergence indicators within the trading community. But undoubtedly, there are many more available that are not mentioned in this article. Each divergence indicator works differently but ultimately has the same ability to show divergence patterns on any price chart on any time frame.
How Do You Use A Divergence Indicator?
The divergence indicator is used for spotting regular and hidden divergence patterns. The divergence patterns are either bullish or bearish. Regular divergence patterns indicate that the trend is running out of momentum. Traders can find divergence patterns by comparing the tops and bottoms on the price chart and comparing them to the divergence indicator. A higher high or lower low on the price that is not matched on the divergence indicator indicates divergence and a potential reversal now or soon. Hidden divergence patterns indicate a trend continuation (price continues to move in its current direction). Hidden bullish divergence is when price is making a higher low or lower high but the divergence indicator is showing the opposite. So when price makes a higher low, the oscillator makes a lower low and when price makes a lower high, the oscillator makes a higher high.
How Do You Confirm Trend Reversal?
A divergence pattern is always just an early warning signal. The divergence pattern does not mean that a reversal will take place immediately. Trends can be strong and sometimes the trend can push further despite the presence of divergence patterns. Traders can use multiple techniques to confirm the trend reversal. They can use candlestick patterns, breakouts in the opposite direction of the moving averages, trend lines, and fractals, and strong support and resistance zones for spotting likely reversal areas. Traders can also use multiple time frame analysis to find chart patterns, Elliott Wave patterns, and other price patterns to assess the probability of a reversal.
What Is The Best Indicator For Trend Reversal?
Indicators that show divergence patterns are very useful for indicating the end of the trend. But divergence indicators often offer early signals. Double divergence patterns or divergence patterns on multiple time frames increase the probability of a reversal taking place. Traders can use other indicators for finding reversal spots. One of the best indicators is the Fibonacci tool, which offers key support and resistance levels on the price chart. Other key indicators for trend reversal are moving averages. Price action breaking the moving averages into the opposite direction of the trend offers key information about the end of the trend and the start of the reversal.