Saturday, August 23, 2008

Divergence Trading

The term “divergence” is basically used to describe the action of the price that is measure in relation to some sort of oscillator indicator. In all actuality, it does not matter exactly what type of oscillator you choose to use. You may choose to use Stochastic, RSI, CCI or MACD. The best quality that divergences possesses is that you are able to use divergences as your leading indicator after you have gotten some practice in, and it’s also really not that difficult to spot.

With divergences, when properly traded, you can be profitable consistently. The absolute best thing about the divergences is that, because you are normally purchasing a currency near the bottom of a trend or selling a currency near the top of a trend, the risk that is associated with your trades is considered to be relatively small in comparison to your potential award.

Lower Lows and Higher Highs

When it comes to divergences, all you need to think about is lower lows and higher highs. In the event that the price is generating highs, the oscillators should be creating higher highs also. In the event that the price is creating lower lows, the oscillator should be creating some lower lows also. In the event that they are not, this is going to reflect that the oscillator and the price are diverging from one another, which is when divergence comes into play. There are two different types of divergence, regular and hidden.

MACD Charts

The MACD charts, or moving average convergence divergence charts, are technical indicators that are derived from the moving average, which is a lot simpler. These charts are considered to be oscillating indicators, which mean they either move above or below the centerline or the zero point. Just like with any other momentum and oscillating indicators, when there is a extremely high value, that is an indication that the stock has been overbought and that it will more than likely drop soon.

On the other hand, when there is a consistently low value, it is an indication that the stock has been oversold and that it is more than likely going to increase. Even though right now, all of this information may seem like pig Latin, once you begin studying forex trading, you are going to see where all of this comes into play. One thing that you have to remember is that there are several different technical indicators that can be used within the forex market.

You are just going to have to find a technical indicator that works for you and run with it. Once you have became familiar with the technical indicators, you want have any more problems with locating an entry and exit point because all of that information will be provided to you, it will just be left up to you to follow through on these things.

Now that you know about divergence trading, MACD charts and lower lows and higher highs, you are more than half way to beginning your career within forex trading.

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