Now, it is time to apply deviations to our transactions to achieve our ultimate goal of profitability.
We will show you some examples of divergences in price and stochastic indicators.
First, let us look at the conventional deviation. The figure below is the USD/CHF daily chart.
We can see from the downward trend line that USD/CHF has been in a downward trend. However, there are already signs that the downward trend will soon end.
Although the exchange rate has reached a new low, the stochastic indicator (the indicator we chose) has a higher low.
Do you smell fishy smell? Haha, the big fish is about to be hooked. Is the downward trend coming to an end? Should we buy now?
If your answer is yes, congratulations, the fish you caught this time is indeed a big fish.
The results show that the divergence of stochastic indicators and price movements sent a good buy signal. The price breaks through the downward trend line and suppresses, and a new upward trend is formed. If you buy near the bottom, your profit may have exceeded 1,000 points, because in the coming months, the USD/CHF exchange rate will continue to rise.
Now, you understand why we should enter the market early in the trend formation?
Before we entered, did you notice that the bottom line of the tweezers was formed at the second low level?
While observing the divergence pattern, we need to pay attention to other clues that may show a trend reversal. This will give you more information about the trend is coming to an end, and also give you more reasons to believe that the power of divergence is really great.
Next, let’s look at examples of hidden divergences. This time, we still look at the USD/CHF daily chart.
As shown in the figure, USD/CHF has been in a downward trend. Note how the exchange rate formed a lower high, but the stochastic indicator continued to hit new highs.
Through our observations, we draw conclusions about the formation of hidden divergences. So, what should we do? Will the exchange rate continue its previous decline?
Of course, if you are not so sure what to do, you can observe the trend line first.
If you plan to sit on the sidelines, the top of your head may be the same as Ge You, because you are crazy enough to pull off all your hair.
The trend continues!
The USD/CHF has been restrained by the trend line and then probed again, and finally fell by nearly 2000 points!
Imagine if you had already portrayed this hidden divergence pattern and decided that the trend would continue, what would happen?
Now, you should be as cheerful as your younger brother, rather than making the whole person look like Ge You.