Stochastic Oscillator Bullish Divergence and Bearish Divergence Trading

Divergence in Stochastic Oscillator - Divergence forex trading is one of the forex signals that can be generated when using the stochastic oscillator indicator.

Divergence forex trading is a signal that a rally or retracement is losing steam and is likely to reverse. It means that last buyers or the last sellers are pushing forex price in one way whereas majority of other traders have stopped trading in that direction and are cautious of a price correction or retracement.

There are 4 types of divergence setups

Example 1: Classic Bullish Divergence

A Classic Bullish Divergence in the stochastic indicator and the forex price is followed by a rise in price.

Stochastic Oscillator Classic Bullish Divergence Setup

When the forex price is making new lows the Stochastic indicator is not moving past its previous lows it is an indication that the downward trend is about to reverse and a bullish forex rally is likely to occur.

In the forex above example the forex price set a new low but it was not coupled with a new low in the measure of Stochastic oscillator indicator, when the price formed a new low then the stochastic indicator should have followed suit, but the stochastic indicator did not therefore the forex classic divergence setup.

Forex classic divergence setup is even stronger because there is combination of a divergence forex trade setup and then followed by a rise above the 20% indicator level. This combines the Overbought and Oversold levels with this forex divergence setup.

Example 2: Classic Bearish Divergence

A Classic Bearish Divergence setup in the stochastic oscillator indicator and the forex price is followed by a drop in price.

Stochastic Oscillator Classic Bearish Divergence Setup

When price is making new highs but the Stochastic oscillator indicator is not moving beyond its previous high it is an indication the upward trend will reverse and that a forex bearish divergence trade setup will follow.

This classic bearish divergence trade setup is even stronger because there is a combination of a divergence with a dip below the overbought 80 level.

Example 3: Hidden Forex Bullish Divergence

Hidden Forex Bullish Divergence trade setup signifies a retracement in an upwards forex trend. This forex hidden divergence setup is the best type of divergence setup to trade, because you aren't trading a price reversal, but you are trading within the direction of the trend.

Stochastic Oscillator Hidden Forex Bullish Divergence

Even though, the stochastic oscillator indicator made a lower low the forex price low was higher than the previous low (higher low). This means that even though the forex sellers made a good attempt to push forex price down as indicated by the stochastic indicator, this was not reflected on the forex price, & the price didn't make a new low. This is the best place to open a buy trade, since it is even in an upwards forex trend there no need to wait for a confirmation signal, because you are buying in an upward trend.

Example 4: Hidden Forex Bearish Divergence

Hidden Forex Bearish Divergence setup signifies a retracement in a downwards trend.

Stochastic Oscillator Hidden Forex Bearish Divergence

Hidden forex bearish divergence forex setup is the best type of divergence to trade, because you are not trading a price trend reversal, but you're trading within the direction of the market trend. This is the best place to open a sell trade, since it is even in a downward trend there no need to wait for a confirmation signal, because you are selling in a downward trend.