Divergence | Read this and learn how to predict trends

Divergence

Divergence

Divergence

Traders will fairly often come across divergence while trading binary options, so it’s very important to know how to react when you see this phenomenon developing. It can come in several different shapes, and we are going to go through the most important features in the following paragraphs. Don’t let the conflicting information on your chart confuse you, things are really not that complicated when you understand what needs to be done. Experienced traders will get the gist of things in an instant, but even rookies should have no problems, so read on and let out experts explain everything. Let’s get started!

Divergence | Basic terms

The first thing we have to do is define divergence. Divergence appears when the oscillator you’re using and the price you’re looking at are moving in opposite directions on your chart or differ significantly in their strength. In these cases, it is always better to trust the indicator shown at the bottom of your screen because it takes much more data and a much bigger timeframe into consideration. The price, on the other hand, applies only to a very narrow gap (one candle). Because of that, divergence can be used to detect a shift in trends – if it’s bullish, call options are recommended; if it’s bearish, you should invest in put options. In other words, if the price is going up, but your Oscillator is not matching its movements, a trend reversal might be just around the corner. Like we said in the opening paragraph, there are several different types of divergence and we are going to discuss them below. Stay with us!

Divergence | Types of divergence

As mentioned earlier, divergence can be bullish or bearish. This is the so-called classic type and it is fairly easy to spot because it is drawn from top to bottom or vice versa, so the discrepancy is quite obvious. However, there is also something known as hidden divergence, which is much more difficult to notice. This is because it forms in the middle of the oscillator range, between 30 and 70. In this case, you want to make sure the oscillator is not entering overbought and oversold territories, so essentially you’re looking for continuation patterns. The easiest way to handle this is to draw a line splitting the oscillator screen in two equal parts. That way monitoring market movements becomes much easier.

Divergence | Conclusion

As you can see, mastering divergence is really not that difficult, although some experience in this type of trading is necessary. The main idea is fairly simple, and you can predict trend reversals with a high degree of accuracy with this strategy. Types are also pretty clear, so there shouldn’t be any confusion when using them. Therefore, if you’re not familiar with this already, investing some time into exploring this principle can go a long way. On the other hand, if you think you already know everything about it, take a look at other articles on our website. There is much more to learn.

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