- Conventional deviation
- Hidden deviation
In this lesson, we will teach you how to depict divergence signals and how to use divergence to trade. Through the study of this course, your gain will be amazing.
Regular divergences are used by traders as signals for trend reversals.
If the price low keeps going down (LL), but the volatility indicator low keeps going up (HL), then this is our common conventional bull divergence.
Regular bullish divergence usually occurs at the end of a downward trend. After the formation of the second bottom, if the shock indicator fails to form a new low, then the exchange rate is likely to rise, and it is usually expected that the exchange rate and kinetic energy will follow the same trend.
The picture below shows the regular bullish divergence.
Now, if the exchange rate forms a higher high (HH), but the volatility indicator forms a lower high (LH), then we will see the formation of a conventional short divergence.
Conventional bearish divergence usually occurs in an upward trend. After the exchange rate hits a high level for the second time, if the volatility indicator continues to decrease, then the exchange rate trend is expected to turn and start to decline.
As shown in the figure below, after the exchange rate formed at the second top, the trend reversed.
The signal from the oscillator indicates that the kinetic energy has begun to change. Although the exchange rate has formed a higher high (or lower low), the chances of the current trend being unsustainable are quite large.
The GBP/USD 15-minute chart shows us a good way to trade using divergence.
The 15-minute chart of GBP/USD shows that the exchange rate initially experienced a short sideways arrangement. After the better-than-expected UK construction PMI data was released, the exchange rate rose, shooting stars and top divergence patterns appeared. Since then, the GBP/USD has generally shown Down trend.
Now you understand it, it’s pretty simple, isn’t it?
Now that you understand the conventional deviation, we will now learn the second type of deviation—hidden deviation.
Don’t worry, hiding and diverging is not as airtight as the secret room, and it is not difficult to portray. We call it a hidden divergence because it is “hidden” within the current trend.
In the next lesson, we will discuss this further.