Although divergence is a fairly effective trading tool, there are times when you may enter the market prematurely because you have not waited for more information to be confirmed. In this lesson, we will teach you some ways to use the odds of divergence trading in order to obtain more information to determine the effectiveness of the divergence.
Wait for the cross to appear
The method we are talking about here is not a rule. Traders just need to wait until the momentum indicator crosses before choosing to enter the market. The crossover of kinetic energy indicators means that the exchange rate kinetic energy may change from overbought to weak, or from oversold to strong. The main reason for waiting for the entry after crossing the kinetic energy indicator is that traders need to wait for the formation of the top or bottom of the exchange rate. Unless the kinetic energy indicator crosses, the formation of the top or bottom is unlikely.
As shown in the chart above, the high formed by the exchange rate is lower than the previous high, but the stochastic indicator has reached a new high. You might think that this is a bearish divergence pattern and you should choose to go short immediately.
However, we have just said that patience is a manifestation of personal virtue. Therefore, it is best to wait until the stochastic indicator has a dead fork before it can confirm that the exchange rate will indeed go lower.
After the formation of several candlesticks, the stochastic indicator does form a dead fork. At this time, it is more safe to choose to trade short bears.
What is the point here? It’s simple, stay patient! Don’t rush to fire, because it is not very certain when the exchange rate kinetic energy will turn. If you do not have enough patience, when the exchange rate continues to fluctuate along the previous trend, you may be hit by yourself.
Wait for the indicator to leave the overbought/oversold area
Another method is to wait until the kinetic energy indicator enters the overbought area or oversold area, and wait for the indicator to leave the overbought or oversold conditions and enter the market.
The reason for choosing this method is the same as the reason for the above method-because you don’t know when the kinetic energy will start to turn.
For example, you are observing the technical graph, and you have noticed that the stochastic indicator has reached a new low, but the price is not yet like this.
You may think that the right candidate is buying, because the stochastic indicator shows that the exchange rate is oversold and the divergence pattern has been formed. However, selling pressure may remain strong, and the exchange rate will continue to fall, and further hit new lows.
If you choose to buy, now you may be a decadent one, because the exchange rate has not rebounded. In fact, the exchange rate may soon open a new round of downward trend, because the exchange rate is forming a lower high. At the same time, if you still play hard, you may miss a new round of downtrend opportunities again.
If you have enough patience, after collecting more information to confirm the formation of the deviation pattern, you may have avoided unnecessary losses and can recognize that new trends are forming.
Judging the breakthrough of the trend line of the kinetic energy indicator
This may sound a little funny, because we generally just draw trend lines on the exchange rate chart, but this method does work, and we will share it with everyone here.
After all, adding a new weapon to your foreign exchange trading toolbox is not always a bad thing. You never know when you might use it!
This method is especially effective when we are looking for a potential reversal market or a trend breaking market. If you see that the exchange rate is testing a certain trend line, try to draw a similar trend line on the corresponding kinetic energy indicator graph.
You may have noticed that stochastic indicators also test trend line resistance. If you see both the exchange rate and kinetic energy indicators break through the trend line, this may indicate that the market’s dominant power is shifting from the buyer to the seller, or from the seller to the buyer, and the trend may also change.