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 your unrealized gains, a.k.a your
potential Aston Martin down payment, vanish before your eyes because your trade
reverses direction?
What if
you believe a currency pair will continue to fall but would like to short at a
better price or a less risky entry?
Well guess what? There is a way! It's called divergence trading.
In a nutshell, divergence can be seen by comparing price action
and the movement of an indicator. It doesn't really matter what indicator you
use. You can use RSI, MACD, the stochastic, CCI, etc.
The great thing about divergences is that you can use them as a leading indicator, and
after some practice it's not too difficult to spot.
When
traded properly, you can be consistently profitable with divergences. The best
thing about divergences is that you're usually buying near the bottom or
selling near the top. This makes the risk on your trades are very small
relative to your potential reward.
Cha-ching!
Higher Highs and Lower Lows
Just
think "higher highs" and "lower lows".
Price and
momentum normally move hand in hand like Hansel and Gretel, Batman and Robin,
Serena and Venus Williams, salt and pepper...You get the point.
If price is making higher 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. And that's why it's called
"divergence."
Divergence
trading is an awesome tool to have in your toolbox because divergences signal
to you that something fishy is going on and that you should pay closer
attention.
Using divergence trading can be useful in spotting a weakening
trend or reversal in
momentum. Sometimes you can even use it as a signal for a trend to continue!
There are TWO types of
divergence:
1. Regular
2. Hidden
In this
grade, we will teach you how to spot these divergences and how to trade them.
We'll even have a sweet surprise for you at the end.
