Trading is a game in which one is rewarded for risk. It is the game that doesn’t spare the players who haven’t learned its rules. Failure is guaranteed for those who arrange their work according to principles: “become rich as soon as possible” or “get the desirable thing right now”.
1.divergencies types of Class A
It is the most strong type of forex divergencies in trading, which gives, in its turn, the best trading signals.
Divergencies of Class A usually point at abrupt and significant turn of trend:
• Bear divergency of Class A occurs when price makes new maximum and oscillator/indicator makes lower maximum. The important thing for identification lies in the fact that the second (lower) maximum of the indicator doesn’t have enough impulse to exceed its previous maximum. It becomes a very strong signal for alteration of price impulse.
• Bull forex divergency of Class A occurs when price makes new minimum and oscillator/indicator makes higher minimum. The important thing for identification lies in the fact that the second (higher) minimum of the indicator doesn’t have enough impulse to exceed its previuos minimum. It becomes a very strong signal for alteration of price impulse.
The characteristics of bear and bull divergencies of Class A:
Dark blue lines represent price behavior, and red lines represent oscillator movement.
2.forex divergency of Class B
Although this divergency type forms with sufficient impulse, it is recommended to confirm it with some other factor before entering a deal.
It is a weaker type of divergency, which signals about gradual turn of trend.
• Bear divergency of Class B occurs when price makes double top and oscillator/indicator makes lower maximum. This means that there could remain some price impulse which was sufficient for continuing of the previous trend. This double top can be defined as the balance area where bears and bulls have equal power. Therefore, this setup must be traded cautiously.
• Bull forex divergency of Class B occurs when price makes double bottom and oscillator/indicator makes higher minimum. This means that there could remain some price impulse which was sufficient for continuing of the previous trend. This double basis can be defined as the balance area where bears and bulls have equal power. Therefore, this setup must be traded cautiously.
The characteristics of bear and bull divergencies of Class B:
3. Divergency of Class C
This is the weakest type of divergencies, which can usually be met at changeable market and generally must be ignored.
We define it only in order to know which kind of divergency we must avoid.
• Bear divergency of Class C occurs when price makes higher maximum and oscillator/indicator stops in the same area as the previous top. To be brief, the indicator makes double top showing that the loss of the main trading impulse is not very big.
• Bull forex divergency of Class C occurs when price makes lower minimum and oscillator/indicator stops in the same area as the previous bottom. To be brief, the indicator makes double bottom showing that the loss of the main trading impulse is not very big.
The characteristics of bear and bull divergencies of Class C:
At the picture you can see the typical example of the chart with Correct Bull and Bear Divergencies of Class A, which resulted in abrupt and significant turn of price:
Despite the fact that more often traders look for the Correct Divergency, there is another divergency type that is not used regularly but is much more effective.
It is called Hidden Divergency that is also the difference between price and indicator except it is a model of continuation.
It can be described in the following way:
• Bear Hidden Divergency – Lower price maximums and higher oscillator maximums point out the confirmation of descending price trend.
• Bull Hidden Divergency - Higher price minimums and lower oscillator minimums point out the confirmation of rising price trend.
The characteristics of hidden divergency:
Although Hidden Divergencies are the opposites to Correct Divergencies, they suggest bigger potential since they precisely define entries into trend direction.
We can say that it is a pattern that enables the traders to enter prevailing trend, and therefore gives better profit potential.
The picture shows the typical example of classic Bull Hidden forex divergency.
It can be seen that Hidden Divergency gives us excellent confirmation of proceeding trend and wonderful entry point:
Divergencies inside their own (single) class can be also different in their strength.
For example, ordinary divergency of Class A (the strongest) can be quite weak if the tops of prices basing on which it was specified are located close in time and with small price interval but also can be “wide” and “high”.
Now try to compare the strength of narrow and low divergency of Class A with that of Class B, which is wide and high.
Which of them would be stronger? Strong (A) or weak (B)?
You will be sick and tired of comparing, so I will tell you the following: weaker in fact divergency B can be stronger in real.
Therefore, consider this article as general direction, and further use logic and gain experience.
If we imagine a ladder, then pattern 1-2-3 would be just the next step. Moving upwards we get a correct ladder, and moving downwards we work under the steps.
To avoid confusion on the screen I marked only points 3.
For moving down point 3 must not be higher than point 1.
For moving up point 3 must not be lower than point 1.
Trading with such pattern becomes more reliable and confident.