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 the corrective rallies in a down-trend.

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

Example illustrations of the divergence trading terms:

M shapes dealing with Forex Price highs

How to Interpret/Analyze and Analyze 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 indicator for this set-up is the MACD - as a trade signal MACD divergence is a high probability setup to enter a trade position. But as with any trading signal there are certain precautions and guidelines which have to be considered to make this signal a high probability setup. Getting straight into a trade position as soon as you see this setup isn't the best strategy. This setup should be used in combination with another indicator to confirm the market 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 and analyzed to the 4 H chart time frame on MT4 trading platform.

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

This brings us to a key point and factor when using this trading signal to open a trade transaction: on a higher time-frame MACD divergence can be a fairly reliable indicator of a shift in the price direction. However, the large question is: WHEN? That is why getting straight in to a trade position as soon as you see this setup isn't always the best 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 strength to continue in current direction. The investor and trader who has opened a trade too soon can only stare at and watch the screen in dismay as the price moves through his stop loss order taking him out.

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

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

1. Support level, Resistance levels & Forex Fibo levels on higher Chart Time Frames

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

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

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

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