News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site. See our updated Privacy Policy here.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
Subscribe
Please try again
More View more
Real Time News
  • Do you know the difference between investing and trading? Because while the goal might seem the same, they're very different things . Learn more here.https://t.co/fG6fNEPj9q https://t.co/ymGaYjrl1g
  • What is your forex trading style? Take the quiz and find out: https://t.co/YY3ePTpzSI https://t.co/FOMcsxci50
  • Further your trading knowledge and gain informed market analyses from our expert analyst @DavidJSong on Oil with our free Q4 guide, available for free today.https://t.co/Y6XECmr5fQ https://t.co/XQI3PN4bkQ
  • Nasdaq 100 may hit new high soon. https://t.co/ACtVqiOBl0
  • HSTECH index has likely formed an "Inverse Head & Shoulders" pattern. https://t.co/YFIQEYmuyq
  • The HSI has likely formed a “Double Bottom” chart pattern, which is usually viewed as bullish-biased. https://t.co/wMQ14A867Q
  • When markets are falling, how can you short sell? Learn more here:https://t.co/K4EFd6A6xd https://t.co/ynjtSQqHVy
  • Futures have their own set of characteristics and appeal to different types of traders and investors for a variety of reasons. Get your free trading guide and learn to trade the markets with futures here. Download your guide today!https://t.co/72oKM0kLHL https://t.co/dLBhWmxuub
  • Relative stability in EUR/USD has masked weakness in the Euro against most other major currencies, and that weakness can be expected to persist in the week ahead and likely for longer. Get your weekly Euro forecast from @MartinSEssex here: https://t.co/g6aCr7Uxg2 https://t.co/KZHBa4GXCN
  • Technical analysis of charts aims to identify patterns and market trends by utilizing differing forms of technical chart types and other chart functions. Learn about the top three technical analysis tools here: https://t.co/KDjIjLdTSk https://t.co/Z8oipLero0
How to Trade Indicator Divergence

How to Trade Indicator Divergence

Walker England, Forex Trading Instructor

Talking Points

  • Oscillator divergence can be used to identify Forex reversals.
  • Traders will look for indicators to separate from price to pinpoint diverging markets.
  • Traders can take advantage of divergence, by using a variety of trend based strategies.

Many traders look at oscillators such as RSI, CCI and Stochacstics for theiroverbought and oversoldlevels. While using these levels can be helpful to traders for pinpointing entries, there is another way to use oscillators that is often overlooked. Divergence is a potent tool that is imbedded inside of oscillators that can be used to spot potential market reversals by comparing an indicator with market direction.

Let’s take a look at how divergence works, using the AUDUSD Daily graph seen below.

Learn Forex – AUDUSD Daily Trends

How_to_Trade_Indicator_Divergence_body_Picture_2.png, How to Trade Indicator Divergence

The word divergence itself means to separate and that is exactly what we are looking for today. Typically Oscillators such as RSI will follow price as the AUDUSD declines. So when the AUDUSD goes lower, usually so will the indicator. (If you’re unfamiliar with RSI – Register for Our Free Course Here). Divergence occurs when price splits from the indicator and they begin heading in two different directions. In the example below, we can again see the AUDUSD daily chart with RSI doing just that.

To begin our analysis in a downtrend, we need to compare the lows on the graph. In a downtrend prices should consistently be making lower lows. That is exactly what the AUDUSD does as it declined as much as 1734 Pips between March and August 2013. To find divergence, it is important to mark the dates of these lows as we need to compare them with the lows created on the RSI indicator. Now notice how, we can see RSI making a series of higher lows at the same points. This is exactly the divergence we are looking for!

Learn Forex – AUDUSD Bullish Divergence

How_to_Trade_Indicator_Divergence_body_Picture_1.png, How to Trade Indicator Divergence

Once spotted traders can then employ the trend based strategy of their choosing while looking for price to swing against the previous trend and break to higher highs. It is important to note that when trading price reversals, indicators can stay overbought and oversold for long periods of time. As with any strategy traders should be using stops to contain their risk. One method to consider in a downtrend is to employ a stop underneath the current swing low or other supported area of price.

---Written by Walker England, Trading Instructor

To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.

Want to learn more about trading RSI? Take our free RSI training course and learn new ways to trade with this versatile oscillator.Register HERE to start learning your next RSI strategy!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES