If you have been around Forex chat rooms or forums for any amount of time, one term you would have heard of many times is Divergence. While by no means a fool proof indication, it is a nice thing to store in the back of your already full brain to help you in confirming suspected trend changes.



Above is a snap shot of the hourly chart of AUD/USD in the week just gone (click on it to see it larger). Divergence is essentially when an indicator is trending in the opposite direction to the price. You can see in the above chart, a trend line clearly shows the price at this time is making a series of lower highs and lower lows, so it is in a clear downtrend.

Below that is an indicator called the Stochastics, with settings of 15, 5, 5. Here you can see that as the price is making lower lows, the indicator is making HIGHER lows, so the price is downtrending, the stochastic indicator is in an uptrend, this is Divergence.

When you see this occur, look out for a sign of a reversal of the current price trend, in this case, it happened when the price broke the trend line as indicated by the orange area. I don't trade this method currently of course, but it something good to know, and something to look out for if you are trying to figure out if the trend will continue.

Best of luck, hope it helps.

This entry was posted on Saturday, September 10, 2005 at 5:51:00 PM. You can skip to the end and leave a response.