To Avoid Early Entries Trading Divergences in Forex, one must take his or her entries after confirmation on the oscillator. Or else he or she will always be stopped out jiffy after the entry.
To profit while trading divergences, one would like to possess perfect entry timing therefore every found out requires patience and discipline.
- WAIT FOR A CROSSOVER OF THE HISTOGRAM ON THE MACD INDICATOR
The shift of the MACD histogram acts as a confirmation signal for the trade entries on divergences.
This indicates a shift in momentum from either the buyers or sellers depending on the trend direction.
Suppose you were using MACD indicator, as the histogram makes bottoms or tops, price also does the same.
Draw trend lines on the indicator so that you are able to compare the indicator top or bottom positions with the price action.
After confirming a divergence, one have to wait for the histogram to cross over to the other side of the zero line.
When it happens, this shows that either the buyers or sellers have given up and therefore the trend reversal might be a head or continuation . It is now time to buy or sell.
- DIVERGENCE WORKS BETTER IN EXTREME CONDITIONS; OVERBOUGHT AND OVERSOLD CONDITIONS
Technical oscillators like Relative Strength Index(RSI) and Stochastics show oversold and overbought conditions within the market.
Divergences are more reliable during the overbought and oversold market conditions.
Relative Strength Index (RSI)
When price hits the overbought conditions the RSI indicator crosses the 70 level. This indicates that momentum within the uptrend is probably going to vary because the currency pair is overbought.
Wait for the confirmation for trend reversal when the RSI crosses below the 70 level pointing down.
After you’ve got spotted a divergence, patiently await the RSI indicator signal confirmation.
The fact that it already indicated the overbought market condition, the trend stands high chances to vary direction.
To get stronger confirmation combine the oscillators with other technical indicators like line and support and resistance.
You should also consider trading on a better time-frame . the upper the time-frame, the more reliable the signal is.
For instance, a divergence on a daily chart is far more significant than that on a 5 minute chart.