In Forex trading, the readiness of the market for reversal is of particular interest. It is important to find a signal in time to indicate this and identify it, taking advantage of it. This signal is a divergence – the discrepancy between the price indicator and the indicator. Different types of indicators can be used, but the most popular oscillators are: CCI, MACD, RSI, Stochastic, etc. They reflect the difference of values better than others, indicating a change in market trend (trend reversal).
Divergence of oscillator type indicators is classified by force level. It is divided into three classes:
- Class “A”. Signal sharp trend reversal. Formed a new price maximum. With a bearish divergence, the lower (each subsequent) maximum of the oscillator (indicator) cannot exceed the value of the previous maximum. With a bullish divergence, the subsequent (higher) minimum does not exceed the value of the previous minimum. Conditions for trade are most favorable.
- Class “B”. The signal is a gradual reversal. When the bearish divergence forms a double top of the price. The indicator maximum is low. When bullish divergence forms a double bottom (base) prices. The indicator minimum is high. In both cases, the price has a residual impulse, which indicates the possibility of continuing the previous trend. Care should be taken when trading in this setup.
- Class “C”. Signal of a weak trend reversal. Bear divergence shows the formation of a high maximum price. The indicator remains at the level of the previous vertex (a double vertex of the oscillator is formed). With a bullish divergence, the price shows a low minimum. The indicator does not change its indicators, remaining at the level of the previous bottom (a double bottom of the oscillator is formed). This indicates that the losses of the main impulse are insignificant. It is recommended to ignore the divergence of this class.
Another type of divergence is used on oscillator-type indicators – hidden divergence. It is considered the most effective. Signals a trend reversal with a continuation. It is characterized by:
- High oscillator highs and a low price high at a bearish divergence, which confirms a downtrend.
- Low indicator lows and high price lows in bullish divergence. This is a confirmation of the rising brand.
Hidden divergence has great potential. With it, you can accurately determine the entrance to the prevailing trend, which increases the potential for profit.