DIVERGENCE TRADING SETUPS SUMMARY

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

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

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

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

Divergence Forum - Illustrations of the divergence terms:

M shapes dealing with Price highs

M-shapes - Divergence Forum

W-shapes dealing with price lows

W-shapes - Divergence Forum

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

One of the best indicator for this setup is the MACD - as a signal MACD divergence is a high probability setup to enter a trade. But as with any signal there are certain precautions which have to be observed to make this signal a high probability setup. 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 cross over system.

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 timeframe on MT4 software.

If divergence setup seen on a 60 minute chart, 4 hour chart, or daily chart timeframe, 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 this divergence setup signal to enter a trade: on a higher time frame MACD divergence can be a fairly reliable indicator of a change in price direction. However, the big 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 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 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 trader should also consider other factors, specifically other 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 timeframes before opening an order based on lower timeframes.

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 time-frame 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 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 set-up can offer huge profit potential.