Forex Divergence and Convergence
- VFX Blog
- For beginners
Determining divergences and convergences visually or using technical indicators helps the trader to quickly see a lower or higher momentum, for the continuation or reversal of the trend. This is one of the best tools for how to make money on binary options and achieving the best trading results.
All technical indicators and chart analysis patterns operate on historical data, so they do not give a 100% correct forecast. However, divergence can be one of the best options trading signals, showing how the market may behave in the near future on any trading asset.
Let's first define the terms convergence and divergence.
Convergence describes a condition under which an asset's price and the value of another asset, index or any other related item move in the same direction. For instance, let's assume a situation in which market prices show an uptrend, and so does our technical indicator. In this case, we face continuing momentum, and there is a high probability that the trend will persist. So, here, the price and top binary options signals converge (i.e. follow the same direction), and the trader may refrain from the sale, as the price is likely to further grow.
Divergence, to the contrary, describes a condition under which an asset's price and the value of another asset, index or any other related item move in opposite directions. For example, if we again consider the situation when market prices are rising, and the value of a technical indicator is falling, we will encounter a decrease in momentum, therefore, with signs of a trend reversal. The price and the technical indicator are at odds, so the options signals service can choose the PUT-option for maximum profit.
So, divergence and convergence trading uses the same tools, strategies and actions of a trader to assess the dynamics of the stock, foreign exchange and cryptocurrency market. In a more detailed study of the forex divergence system, it should be said that there may be two situations for binary options trading signals: upward reversal (bullish divergence) and downward reversal (bearish divergence).
Classic (Regular) Divergence in trading
Classic (regular) divergence in trading is a situation where price makes higher highs or lower lows, and the oscillator does not do the same. This is the main sign that the trend is ending, we are waiting for a reversal. Thus, the exact binary options strategy based on the identification of such probability of trend reversal and the subsequent analysis for revealing where and with which intensity such reversal may occur.
Classic (regular) bearish divergence is a situation in which there is an uptrend with the simultaneous achievement of higher maximum by price action, which remains unconfirmed by the oscillator. Overall, this situation illustrates a weak upward trend. In those circumstances, the oscillator may either strike a new minimum or reach double or triple tops. In case of this situation, our divergence binary options strategy should be to prepare for opening a PUT-option, as there is a signal of a possible downtrend.
Classical (regular) bullish divergence assumes that in the conditions of a downtrend, price movement reaches lower lows, which is unconfirmed by the oscillator. In this case, we face a weak downward trend. The indicator may either strike higher lows or achieve double or triple bottoms (which more often occurs in range-bound indicators such as RSI or Stochastic). In this case, our strategy for binary options should be to prepare for the opening of the CALL-option, since there is a signal about a possible uptrend.
- Moving Average Convergence Divergence (MACD) - in divergence trading, the MACD histogram in a way to reveal those moments at which price does an upward or downward swing, but MACD does not do so. Such a situation illustrates the divergence between price and momentum. MACD is a fairly simple and simple option to understand how binary options signals work on divergences.
- Relative Strength Index (RSI) is the first oversold and overbought indicator to show an imminent trend reversal. Using the RSI chart is similar to using the MACD histogram, and the main task here is to identify the moment when the price and RSI begin to diverge. It may be the best divergence indicator in technical analysis.
- Stochastic indicator is used in divergent trading as an indicator of momentum, based on the assessment of the closing price of the asset and its comparison with past periods and winning binary signals. The method of using it is the same as in the previous two indicators.