FX:GBPJPY   British Pound/Japanese Yen
The question we might all have asked ourselves is: how do we recognize a reversal and how do we recognize a retracement?

(I am a newbie, so please if you have anything valuable to add, by all means help me and other newbies out by sharing your knowledge about the subject.)

The divergence shown in the indicators can often lead to confusing thoughts. Rule of thumb I have decided to stick to, has been a combination of the following conditions that have to be met.

  • ]if I notice divergence on a larger timeframe (say 1H 4H or DAILY) then the chance of that divergence leading to a reversal is much higher than were the divergence spotted on a 30m/15m/5m chart. For that reason I do not try and detect reversals of the dominant trend on those charts. The minimum is 1H.
    This is all depends on your tradingstyle of course.

  • I compare divergences that lead to retracements, to those that lead to reversals. If the divergence that has been spotted on the 1H or higher timeframe, is significantly wider compared to other divergences within that larger trend (that announced retracements), then the chance of it, announcing a reversal, is much higher.

  • Also if the divergence that has been spotted on a larger timeframe has also begun to move close to or nearby a support and resistance level that had significance on one or two larger timeframes, then chances are the reversal is a fact.

Thank you.
Have a great weekend!
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