be either bearish or bullish. This is a major sign of the possibility that the trend is touching its end, and reversal should be expected. In case of this situation, our divergence forex strategy should be to prepare for opening a short position, as there is a signal of possible downtrend. For instance, if we consider again a situation where market prices grow and the technical indicator's value drops, we will face decreasing momentum, and thus signs of trend reversal. So, basically, forex divergence trading and convergence trading focus on the same tools and mechanisms and embrace the same actions performed by the trader for evaluating market dynamics. In this case, we face a weak downward trend.
Classic (regular) divergence in forex trading is a situation where price action strikes higher highs or lower lows, without the oscillator doing the same. In this situation, there is a continued downward trend signal, and the best option for us is either to hold or to open a new short position. Forex Divergence indicators, a number of different forex divergence indicators may be used in forex divergence trading. Hidden Divergence, in contrast to classic (regular) divergence, hidden divergence exists when the oscillator reaches a higher high or lower low, while price action does not do the same. For instance, let's assume a situation in which market prices show an uptrend, and so does our technical indicator.
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Stochastic indicator is used in divergence trading as a momentum indicator based on the evaluation of a stock's closing price and its comparison with such stock's price range over a particular period. Exaggerated bullish divergence occurs when price creates two bottoms on relatively the same line, while the technical indicator diverges and has its second bottom at a higher level. Divergence in forex, to the contrary, describes a condition under which an asset's price and the value of another asset, index or any other related item move in opposite directions. In fact, such situation illustrates the divergence between price and momentum. Overview of Convergence and Divergence in Forex. Contents, overview of Convergence and Divergence in Forex. This indicates a signal that the downtrend is still strong, and it is likely to resume shortly thereafter. Hidden bearish divergence is a divergence trading forex situation in which correction occurs during a downtrend, and the oscillator strikes a lower low, while price action does not do so, remaining in the phase of reaction or consolidation. Classical (regular) bullish (positive) divergence assumes that in the conditions of a downtrend, price action achieves lower lows, which is unconfirmed by the oscillator. This may be the best divergence indicator in forex for traders able to perform basic technical analysis. Overall, this situation illustrates the weak upward trend.