Bullish and Bearish Divergence in Forex Trading Strategies

·       A disagreement between price action and the indicator (RSI)

·       Price will lie, the indicator will not.

·       You can use this to spot the end of a pullback or at the point of a possible reversal.

·       Divergence is telling us that the market is changing.

WHAT ARE THE MOST IMPORTANT LEVELS?

·       Asian session high/low

·       Yesterday’s high/low

·       50, 200, 800EMAs (pullbacks move off these levels)

·       ADR Max (reversal point)

WHAT DOES IT TELL US?

·       If in a trade, and divergence presents against us we may need to consider an exit.

·       If we are looking to enter a trade into divergence we have to note that it will be a less probable trade because divergence is present.

·       Don’t assume reversal just because divergence is present, use it as a warning flag.

·       You can find it in trend and counter-trend

HOW DO WE USE DIVERGENCE?

BEARISH DIVERGENCE

WHERE DO WE DRAW IT IN AN UPTREND?

(L50 in the buy zone & EMAs long biased)

·       Bullish divergence would present off an EMA or significant level, in direction of the trend

·       Drawn on the bottom of price action and the RSI

·       D1 Entry in direction of the overall trend

·       Bearish divergence would present at a significant level (OB/OS or Maxed ADR) going counter-trend

·       Drawn on top of price action and the RSI

·       D2 entry signaling reversal off the top

WHERE DO WE DRAW IT IN A DOWNTREND?

(L50 in the sell zone & EMAs short biased)

·       Bearish divergence would present off an EMA or significant level in direction of the trend

·       Drawn on the top of the RSI and price action

·       D1 entry - used to get into a trade-in direction of the overall trend

·       Bullish divergence would present at an extreme and off a key level

·       Drawn on the bottom of price action and the RSI

·       D2 entry - used to find a bottom signaling reversal

HOW DO YOU DRAW DIVERGENCE?

·       Find the RSI high or low (reaction point 1)

·       Find the price action high or low (reaction point 2)

2 REACTION POINTS

IDENTIFYING THE TWO POINTS

IT CAN HOLD DIVERGENCE FOR HOURS

PRACTICE IDENTIFYING DIVERGENCE

HOW DO YOU TURN THIS INTO AN ENTRY SIGNAL?

NAMING THE SIGNALS

In trend: D1

Countertrend: D2

WHAT’S THE DIFFERENCE?

In trend:

The signal will be of a significant level like the 50ema, 200ema, or Asia high, yesterday's high, etc...

The higher time frames agree with the direction, multiple reasons to be in this trade

WHAT’S THE DIFFERENCE?

Countertrend:

These will present at the extremes — OB and OS — looking for a full reset back to the 800ema

These should also use the higher time frames to confirm or deny the direction you're trading in the reversal