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Chapter 18, Part II. Trading Divergences.

Discussion in 'Complete Trading Education- Forex Military School' started by Administrator, Oct 13, 2011.

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  1. Administrator

    Administrator Just Administrator :-)

    Sep 24, 2007
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    Part II. Trading Divergences. [​IMG]
    Commander in Pips: Here we will take a look at couple of examples. But first let’s appoint some major rules on how to treat divergences:

    1. Common/regular divergences are reversal patterns, while hidden/skewed divergences are continuation ones;

    2. Any divergence is not a signal, but is some sort of indicator;

    3. It’s unwise to rely on any divergence and trade it solely, since divergences fail as often as they work, or even more often. Personally, I do not rely on divergences, except for just one type of it – we will discuss it advanced talks. This divergence is called “Dynamic pressure” or “Market pressure”;


    4. Most of the time the market very rare marks reverse just with some single pattern. Hence divergence very often becomes a companion of a classical reversal pattern, candlestick patterns and/or harmonic patterns.

    5. If you use some normalized indicator, such as Stochastic and RSI for estimating divergences – wait for when it will move out from the overbought/oversold zones before treating divergence as reliable. Also it’s better to wait until lines crossover that confirms the divergence - it also applicable to MACD.

    6. It is unsafe to take a position against the divergence, so if you are unsure about what to do – do nothing. This decision is as good as do anything, and much better than do something wrong.

    7. In other words – do not trade every divergence that you see. Look at it as on an indicator and use it just as additional tool in overall trading context - as part of whole puzzle.

    Also from a practical standpoint its better treat divergence as additional confirmation sign that appears at some strong reversal area. Say, te market has reached some daily Fib resistance or even Confluence, daily overbought and, for instance, Agreement of pivot resistance 1. Daily trend holds bearish. Right at this level on hourly or 4-hour chart you see Bearish divergence that combined with other patterns, say, H&S as we’ve seen on chart #1 in previous part. That divergence you may use as confirmation of probable reversal.
    #1 Administrator, Oct 13, 2011
    Lasted edited by : Apr 16, 2016
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