A divergence is when a security and a
related, normally highly correlated,
momentum oscillator or alternative pair move in opposite
Normally A trader can look to two highly
correlated stocks, futures, commodities and currency pairs to see if a
divergence is occuring between two. For example we may see the inverse DXY
(USD index) to be rising along with ES_F (Emini SP500 futures) when this
occurs something has to change...
Divergences are a low risk
way of picking tops or bottom in the markets as they are easy to spot and
even easier to trade profitably.
In this guide we will concentrate on using
indicators for a specific FX pair and not talk about intra-pair
To do this we will use momentum oscillators,
you can use anything from Stochastics, RSI, MACD (moving average
convergence DIVERGENCE) or even CCI.
Most strategies using indicators are LAGGING.
i.e. they require past price action to predict future such as a stochastic
crossover or RSI moving up under 30.
divergence trading are LEADING strategies.
Types of divergences:
---REGULAR and HIDDEN---