What is a divergence? It's a situation when the price diverges with the movements of oscillators such as , , mainly. There are and divergences, standard and hidden. Sometimes you can face with double divergences where the market forms 3 tops/bottoms but not 2 like with standard divergences.
I prepared an example of a standard from Facebook market. I hope you will get a better understanding of how to trade based on divergences
The price bounced from 123.00 level and confirmed the price reversal. We got a new swing low which was lower than the previous one. But made a new swing low higher than the previous one. It means that the price diverged with and we got a . The same goes about the price and lines.
This could be used for opening long positions against the main downtrend based on the trend reversal signal. Entry level could be above the local swing high after the divergence - it's 136.50 level. As you can see the market made a good upward movement. It could give you a profit!
Also, I advise you to look at DMI indicator. How it moved in the period of forming. line made new swing high lower than the previous one. We got a signal that bears became weaker and the market had no power for moving lower.
Divergences can be used in different markets and timeframes.
Divergences, as well as reversal chart patterns, allow trading against the main trends. In other cases, trading against the main market movements - it's a very unprofitable idea!
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