Divergences is one of few – if not the only – indicators that can be used as a leading indicator. It will take some practice, but after a while they are not so difficult to spot. When you know how to trade divergences you really have an extra edge in your toolbox.
How to Trade Divergences
When after watching the videos above you know how to trade divergences, you can be very consistently profitable with them. And the best thing about divergences is that you’re very often buying from the bottom and selling from the top. This makes the risk on your trades are very small relative to your potential reward.
The Potential in Divergence
Knowing how to trade divergences can provide you with a real extra edge. It is a very powerful early indicator of trend reversals and works really well in combination with another trading system. Divergence is, however, not fool proof and you need to educate yourself on more than just this. On its own divergence will often give you some false positives. So use it with your knowledge of reading the market or with another strategy. As often mentioned; trading forex is an odds game and you want to put the odds to in your favour as much as you can.
As with any trading strategy, you should be using stops to limit the risk. Limiting your risk and protecting your account is key to have long term growth. Also, just like in any strategy or indicator it is important to know why an indicator behaves like this. Why does the price move from there? And answering “simply because the indicator indicates as such”, is not good enough. The price reacts from that area, because that specific level has some importance. Find out why, use it with price action and know what you’re trading.