Learning how to identify divergences can be a handy advanced trading tool, as it is often used to predict reversals or continuations in price action. Looking at divergences means watching the highs or lows of the currency pair and comparing it to the highs and lows of the oscillator. The kinds of divergences can be grouped into four main ones.
The first kind is the regular bullish divergence. This is formed when price makes lower lows while the oscillator makes higher lows, and is useful in pinpointing reversals. Price makes lower lows when it is in a downtrend but the formation of higher lows in stochastic suggests that a new trend is about to take place.
The next kind is the regular bearish divergence. This is formed when price makes higher highs but the oscillator makes lower highs. This is useful in pinpointing reversals also since price makes higher highs during an uptrend, but the formation of lower highs by the oscillator hints at a possible downtrend.
Third is the hidden bullish divergence. This takes place when the currency pair draws higher lows while the oscillator sketches lower lows. It is used in predicting a possible continuation of the current trend. Price has higher lows during and uptrend and a lower dip by the oscillator reflects more buying energy to take the pair higher.
Fourth is the hidden bearish divergence. This happens when the currency pair makes lower highs while the oscillator draws higher highs. It is also used in predicting a potential continuation of the ongoing downtrend. Price makes lower highs during a downtrend but the larger pop in the oscillator means more pressure to push the pair down.
Of course there are differing conventions involved in pinpointing divergences, as some traders prefer stricter rules while others are more relaxed. In particular, some traders count highs in the oscillator as those going above 80 and lows as those going below 20.
The first kind is the regular bullish divergence. This is formed when price makes lower lows while the oscillator makes higher lows, and is useful in pinpointing reversals. Price makes lower lows when it is in a downtrend but the formation of higher lows in stochastic suggests that a new trend is about to take place.
The next kind is the regular bearish divergence. This is formed when price makes higher highs but the oscillator makes lower highs. This is useful in pinpointing reversals also since price makes higher highs during an uptrend, but the formation of lower highs by the oscillator hints at a possible downtrend.
Third is the hidden bullish divergence. This takes place when the currency pair draws higher lows while the oscillator sketches lower lows. It is used in predicting a possible continuation of the current trend. Price has higher lows during and uptrend and a lower dip by the oscillator reflects more buying energy to take the pair higher.
Fourth is the hidden bearish divergence. This happens when the currency pair makes lower highs while the oscillator draws higher highs. It is also used in predicting a potential continuation of the ongoing downtrend. Price makes lower highs during a downtrend but the larger pop in the oscillator means more pressure to push the pair down.
Of course there are differing conventions involved in pinpointing divergences, as some traders prefer stricter rules while others are more relaxed. In particular, some traders count highs in the oscillator as those going above 80 and lows as those going below 20.
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