DIVERGENCE FOREX TRADING SETUPS SUMMARY

Classic Bearish - HH price, LH indicator - Indicates the underlying weakness of a price trend - Warning of a potential reversal in the market trend from upward to downward.

Classic Bullish - LL price, HL indicator - Indicates the underlying weakness of a market trend - Warning of a possible reversal in the trend from downwards to upward.

Hidden Bearish - LH price, HH indicator - Indicates under-lying strength of a price trend - Mainly found during corrective rallies in a down-trend.

Hidden Bullish - HL price, LL indicator - Indicates the underlying strength of a price trend - Occurs mainly during corrective declines in an up-trend.

Illustrations of the divergence terms:

M shapes dealing with Forex Price highs

How to Interpret Trading Divergence Setups of M-Shapes Price Highs and W-Shapes Price Lows

M-shapes

W shapes dealing with price lows

W Shapes price lows - divergence strategy trading

W-shapes

These are the shapes to look for when looking for when using these setups.

One of the best trading indicator for this set-up is the MACD - as a trade signal MACD divergence is a high probability set-up to enter a trade position. But as with any signal there are certain precautions which have to be observed to make this signal a high probability setup. Getting straight into a trade position as soon as you as a trader see this setup is not the best strategy. This setup should be used in combination with another indicator to confirm the direction of the currency trend. A good system to combine with is the MA cross over trading strategy.

Be aware this setup on a smaller timeframe is not so significant. When divergence is seen on a 15 min chart it may or might not be very important as compared to the 4 hour chart time-frame on MetaTrader 4 trading platform.

If seen on a 60 minutes trading chart, 4 hour chart, or daily time frame, then begin looking for other factors to indicate when the price may react to the divergence.

This brings us to a key point when using this signal to open a trade transaction: on a higher time-frame MACD divergence can be a fairly reliable technical indicator of a change in price direction. However, the large question is: WHEN? That is why getting straight in to a trade as soon as you see this setup is not always the best trade strategy.

Many investors get caught out by entering the market too soon when they see MACD divergence. In many cases, price has still got some momentum to continue in current direction. The investor who has jumped in too soon can only stare at screen in dismay as price moves through his stop loss taking him out.

If you simply look for this setup without any other considerations you'll not be aligning yourself with the best odds, so to increase odds of making a successful trade you as a fx trader should also consider other factors, specifically other trading indicators.

What other factors should you consider as a trader when using this Forex Setup?

1. Support level, Resistance levels and FX Trading Fibonacci levels on higher Chart Time Frames

Another way to greatly increase the chances of a winning trade is to observe higher chart time frame before opening an order based on lower time-frames.

If you observe the hourly, 4 hour or daily chart has reached a major resistance, support or Fib level then the probability of a successful trade based on divergence on a lower chart timeframe at this point increases.

2. Reward to Risk Ratio: FX Trading Equity Management Rules

And finally, when scanning for divergence, it's very important that you enter the trade correctly, so that you have a good risk/reward ratio and only open transactions that have more profit potential than what you are risking. If you understand how to enter a transaction properly, you can gauge your risk/reward before you open a transaction. That way, you can only select to open orders which offer a favorable ratio.

Finally, when used correctly & combined with other indicators to confirm this trading signal, divergence can offer huge profit potential.

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