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 Trading 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 strength of a price trend - Mainly found during corrective rallies in a down-trend.

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

Divergence Community Forum - Illustrations of the divergence terms:

M shapes dealing with Price highs

FOREX DIVERGENCE TRADING SETUPS SUMMARY - Guide to Divergence Setups

M-shapes - Divergence Forum

W-shapes dealing with price lows

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

W shapes - Divergence Community

These are the divergence shapes 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 is a high probability setup to open a trade transaction. But as with any signal there are certain precautions which 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 a trader see this setup isn't the best strategy. This setup should be used in combination with another technical indicator to confirm the direction of the currency trend. A good system to combine with is the MA crossover trading 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 hour chart time frame on MT4 software.

If divergence setup seen on a 60 minute chart, 4 hour chart, or daily chart time-frame, then start looking 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 time frame MACD divergence can be a fairly reliable trading 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 isn't always the best trading 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 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 order taking him out.

If you simply look for this divergence 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 forex trader should also consider other factors, specifically other technical indicators.

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

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

Another way to greatly increase the odds 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 Equity Management Rules

And finally, when looking 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 trade position properly, you can measure your risk/reward before you open a transaction. That way, you can only choose to open orders that offer a favorable ratio.

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

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