DIVERGENCE TRADING SETUPS SUMMARY

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

Classic Bullish Divergence - LL price, HL indicator - Indicates the under-lying weakness of a price trend - Warning of a potential reversal in the trend from downwards to upward.

Hidden Bearish Trading Divergence - LH price, HH indicator - Indicates underlying momentum of a price trend - Mainly found during the corrective rallies in a down-trend.

Hidden Bullish Divergence - HL price, LL indicator - Indicates the underlying momentum of a market trend - Occurs mainly during the corrective declines in an uptrend.

Divergence Community Forum - Example illustrations of the divergence trading setup terms:

M shapes dealing with Price highs

FOREX DIVERGENCE TRADING SETUPS SUMMARY - Guide to Divergence Trading Setups

M-shapes - Divergence Forum

W-shapes dealing with price lows

W-Shapes price lows - Divergence Trade Setups Summary - Types of Trading Divergence Trading Setups

W shapes - Divergence Community

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

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

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

If divergence setup seen on a 60 minute chart, 4 hour chart, or daily chart time frame, then start searching for other factors to indicate when the price might react to the divergence.

This brings us to a key point when using the divergence setup signal to enter a trade position: on a higher timeframe MACD divergence signal can be a fairly reliable trading indicator of a shift in the price direction. However, the large question is: WHEN? That is why getting straight in to a trade as soon as you see this setup isn't always the best strategy.

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

If you simply look for this divergence trading setup without any other considerations you'll not be aligning yourself with the best chances, so to increase chances of making and executing a successful trade you as a forex trader should also take into consideration other factors, specifically other technical indicators.

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

1. Support level, Resistance levels & FX Fib levels on higher Chart Time Frames

Another way to significantly increase the odds of a winning trade is to look at and observe the higher chart time frame before opening an order based on lower time-frames.

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

2. Reward : Risk Ratio: FX Equity Management Guidelines

And finally, when looking for divergence, it's very important that you as a trader enter the trade transaction correctly, so that you as a trader 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 trade position properly, you as a trader can measure your risk/reward before you open a trade transaction. That way, you as a trader can only select to open orders which offer a favorable ratio.

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

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