What if there was a low risk way to sell near the top or buy near the bottom of a trend? What if you were already in a long position and you could know ahead of time the perfect place to exit instead of watching all your unrealized gains vanish before your eyes because your trade reverses direction?
What if you believe a currency pair will continue to fall but would like to go short at a better price or a less risky entry?
Well there is a way. It’s called divergence trading.
Technically speaking what is a divergence? When there is an imbalance between the price element and the oscillator element a divergence occurs. This is the point when the oscillator is providing a strong hint that price may be losing its momentum and a change in price direction may therefore be impending. Both the price action and the oscillator begin to go separate ways and start telling opposite stories.
Higher Highs and Lower Lows
Just think “higher highs” and “lower lows”.
If price is making highs, the oscillator should also be making higher highs. If price is making lower lows, the oscillator should also be making lower lows.
If they are NOT, that means price and the oscillator are diverging from each other. Hence the term, divergence.
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gj Nikhil
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