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Chapter 18, Part I. Divergence Intro. Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 21, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Commander in Pips: Here on chart #2 is an example of bullish divergence, aka convergence. You see, that this kind of pattern is very common and often on market – two convergences (smaller and larger) stand side by side to each other. After every pattern, the market has shown a nice move up.

    Chart #2 | 60min EUR/USD MACD Bullish divergence (Convergence)
    Pipruit: And does divergence always lead to strong reversals?​
    Commander in Pips: Probably not. The point is that divergence is used by traders to estimate reversal points. Although some reversal could appear, it is not always a drastic reversal. As with other reversal patterns, it could lead only to some retracement against the previous trend, sometimes even to very shallow retracement.
    Pipruit: And how we should involve this knowledge in trading divergences?​
    Commander in Pips: Well, one of the major aspects of divergence is the time that passed on forming a particular divergence. Let’s take a look at chart #2. See, first small divergence was forming about 20 hours. Thinking in terms of time – the followed move up was a drastic reversal compared to price action during those 20 hours, but in terms of daily chart, this move will be insignificant. The same is true for the second divergence. It looks huge compares to first one. The followed move up was also solid, in terms of time and price value of this divergence.
    Pipruit: And so what?​
    Commander in Pips: The point is that you should not expect move for 500 pips from divergence on 5-min chart. Moves based on divergence and the time and market swings of divergence itself have to be comparable. Sometimes, you can see that a strong long-term trend has started from divergence on an hourly chart, but this does not happen very often and mostly not due to the divergence itself. In this case, divergence is just a part of the overall puzzle. But traders who do not see other signals think that this long-term daily trend has started due to divergence on hourly chart. That is not quite correct.
    Pipruit: So, we can’t use short-term divergence for judging long-term perspectives?​
    Commander in Pips: Not quite. As I’ve said “part of the puzzle”. It could be used, for instance, if you see strong weekly support and are watching for buy signals that allow you to jump in based on a bullish weekly context. Here you can use daily, or say, even hourly divergence to jump in. But here you treat this divergence not as a single context for trading, but just as a trigger of your expectation. The reason for trading is quite different – weekly bullish context. Divergence here is just a bell that probably your expectations have started to materialize.
    Pipruit: Very delicate thoughts, Commander. But now it becomes clear. Thanks.​
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