Now it's
time to put those Jedi-divergence mind tricks to work and force the markets to
give you some pips!
Here we'll show you some examples of when there was divergence
between price and oscillator movements.
First up,
let's take a look at regular divergence. Below is a daily chart of USD/CHF.
We can see from the falling trend line that
USD/CHF has been in a downtrend. However, there are signs that the downtrend
will be coming to an end.
While price has registered lower lows, the stochastic (our indicator of choice) is showing a higher low.
Something smells fishy here. Is the reversal coming to
an end? Is it time to buy this sucker?
If you
had answered yes to that last question, then you would have found yourself in
the middle of the Caribbean, soaking up margaritas, as you would have been knee
deep in your pip winnings!
It turns
out that the divergence between the stochastic and price action was a good
signal to buy. Price broke through the falling trend line and formed a new uptrend.
If you had bought near the bottom, you could have made more than a thousand
pips, as the pair continued to shoot even higher in the following months.
Now can
you see why it rocks to get in on the trend early?!
Before we
move on, did you notice the tweezer bottoms that formed on the second low?
Keep an
eye out for other clues that a reversal is in place. This will give you more
confirmation that a trend is coming to an end, giving you even more reason to
believe in the power of divergences!
Next, let's take a look at an example of some hidden divergence. Once again, let's hop on to the daily chart of USD/CHF.
Here we
see that the pair has been in a downtrend. Notice how price has formed a lower
high but the stochastic is printing higher highs.
According
to our notes, this is hidden bearish divergence! Hmmm, what should we do? Time
to get back in the trend?
Well, if
you ain't sure, you can sit back and watch on the sidelines first.
If you
decided to sit that one out, you might be as bald as Professor Xavier because
you pulled out all your hair.
Why?
Well the
trend continued!
Price
bounced from the trend line and eventually dropped almost 2000 pips!
Imagine
if you had spotted the divergence and seen that as a potential signal for a
continuation of the trend?
Not only
would you be sipping those margaritas in the Caribbean, you'd have your own
pimpin' yacht to boot!
