There are two types of Divergence trading and they both are used by BUILDERFX. These systems have over 70% winning rate when used on the confluence multple time frame including M5,H1,H4 and daily. We use the divergence signals based on the RSI indicator but traders can use oscillators or other indicators as well.
This is when price creates higher tops on the chart, while RSI indicator is giving you lower tops. After a bearish divergence, price usually makes a rapid bearish move. Notice that this happens despite the previous bullish attitude in the price.
See how bearish divergence was predicting the price turning around.
Some time the divergence will not hold true and price keeps going against it. When is the divergence normally likely to work ? When prices hit a resistance of a higher time frame.
BUILDERFX is able to monitor these apparent bearish divergence on multple pairs and timeframes. This is what it gives it a tremendous edge.
The bullish divergence has absolutely the same characteristics as the bearish divergence, but in the opposite direction. We have a bullish divergence when the price makes lower bottoms on the chart, while RSI is giving a higher bottoms. After a bullish divergence pattern, we are likely to see a rapid price increase in a range based trading market. It is vital to cluster and classify the market. Divergence trading must not be employed in a trend trading market.
See how on the NZDUUSD H1 chart the RSI started to stop falling while price was mmaking new lows. This was a clear indication of the rise coming at the right end of the chart. BUILDERFX is monitoring bullish divergence across multple time frames and multiple pairs to trade them effectively. This is a highly profitable winning strategy.
However, there is a third kind of a divergence, which does not fall into the regular divergence group. This is the Hidden Divergence pattern. This is not used by BUILDEFX but for information is provided below.
Hidden Bullish Divergence
We have a hidden bullish divergence when the price has higher bottoms on the chart, while the indicator is showing lower bottoms.
Hidden Bearish Divergence
As you probably guess, this type of divergence has the same character as the hidden bullish divergence, but in the opposite direction. We confirm a hidden bearish divergence when the price is showing lower tops, and the indicator gives higher tops.
Classic technical analysis tells us that a trend exists when price makes a higher high – but like too often, conventional wisdom is seldom right and usually simplifies things too much. A trader who only relies on highs and lows for his price analysis often misses important clues and does not fully understand market dynamics. Even though a trend could look “healthy” at first glance (higher highs and higher lows), it might be losing momentum at the same time when we look deeper at the candles and the momentum.
Spotting a divergence on your momentum indicator, thus, tells you that the dynamics in the trend are shifting and that, although it could still look like a real trend, a potential end of the trend could be near.