How to Trade Divergences
Knowing what divergences are and knowing how to trade them profitably are two different things. You should put forth your best effort to trade divergences in a way that will be fruitful and profitable for yourself whenever possible.
How to Trade Regular Divergences
As you can see in the chart above, this currency pair is in a downtrend. That said, there are signs that the downtrend may be about to end. The pair is registering lower lows, but the stochastic is starting to reach higher lows than it did before.
This means that there is a divergence between what the stochastic is indicating and how the currency pair is behaving overall. It may mean that the downtrend is coming to an end and it is finally time to purchase the pair. Let’s see how we did:
In the example that we showed above, the price action clearly did take a turn higher, and the people who followed their gut (and the market) were able to clean up on pips as the price climbed higher. They were rewarded for their quick thinking and wise positioning on the pair, and they received a nice trade as a result of those actions.
Trading a Hidden Divergence
The other type of divergence that you will want to try to get your arms around is known as a hidden divergence.
The pair is starting to produce lower highs, but the stochastic is showing higher highs. It is a hidden divergence. The pair is already in a downtrend as you can see, but the downtrend only continued after this hidden divergence showed up. In fact, the hidden divergence was pointing towards a continued downtrend for anyone who was paying close attention to it.
The divergence between the stochastic and the price action of the currency pair itself was an indication that something interesting may be happening in the market.
Those who have had their eyes open to this fact understand that the downtrend was very likely to continue.
There are many ways that divergence could play a role in how you ultimately decide to play your cards when trading, but you should absolutely make sure that it is part of your strategy for getting the most value possible out of each and every trade.
It might be challenging to spot divergences and know what to do about them in the beginning, but it will all start to make sense over time, and that is the most important thing when you are still learning.
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