Forex divergence is a powerful tool used by traders to identify potential trend reversals in the market. It is a trading strategy that involves analyzing the relationship between the price action of a currency pair and an oscillator indicator. Divergence occurs when the price action and the oscillator indicator move in opposite directions, indicating a possible reversal of the prevailing trend. In forex trading, there are different strengths of divergence, which traders use to make trading decisions. In this article, we will explore the different strengths of forex divergence and how traders use them to their advantage.
The first strength of forex divergence is weak divergence. Weak divergence occurs when the price action and the oscillator indicator move in opposite directions, but the divergence is not significant enough to signal a potential trend reversal. Traders usually ignore weak divergence as it may not provide a reliable trading signal. Weak divergence is common in markets that are trending strongly, and traders may experience false signals, which can lead to losses. In such cases, traders may use other technical indicators to confirm the divergence signal before making trading decisions.
The second strength of forex divergence is regular divergence. Regular divergence occurs when the price action and the oscillator indicator move in opposite directions, and the divergence is significant enough to signal a potential trend reversal. Traders usually pay attention to regular divergence as it provides a reliable trading signal. Regular divergence is common in markets that are trending, and traders may use it to identify potential trend reversals. In such cases, traders may use other technical indicators to confirm the divergence signal before making trading decisions.
The third strength of forex divergence is hidden divergence. Hidden divergence occurs when the price action and the oscillator indicator move in the same direction, but the indicator’s movement is weaker than the price action. Traders usually pay attention to hidden divergence as it provides a reliable trading signal. Hidden divergence is common in markets that are consolidating, and traders may use it to identify potential breakout opportunities. In such cases, traders may use other technical indicators to confirm the divergence signal before making trading decisions.
