Profitable Forex Trading - How To Trade Price Reversals Using Divergence Patterns

A very popular way to trade the forex markets is to look for possible price reversals when the current trend appears to be ending

. This is not always that easy to do, but one of the best ways to find possible reversals is to look for divergence patterns.

These divergence patterns present themselves when you employ certain technical indicators, and they are simply where the price of the currency pair makes a new high (or low) but the indicator you are using fails to make a new high (or low). So what do these divergence patterns actually tell you?

Well in simple terms they are basically saying that because the indicator in question is failing to make new highs or lows in accordance with the actual price, the momentum of this trend is starting to run out of steam. Therefore as a result of this, the price is likely to reverse in the opposite direction in the near future.

To look for these useful patterns you can employ any number of different technical indicators, but the most effective ones to use for this purpose are the MACD, CCI, RSI and stochastics indicators. These are all commonly used by a lot of forex traders so the results are often fairly reliable.

As with any trading strategy, the best results are often to be had on the longer time frames, such as the 4 hour or daily charts, for instance, but it is possible to trade divergence on an intraday basis as well. Indeed I will sometimes trade these divergence patterns on the 5 minute charts during the day, particularly when the price is close to a key pivot point as well, as this is often an excellent high probability trading opportunity.

For the very best signals I would suggest that you look for divergence on at least two of these indicators. If you just use one, then you are far more likely to see a greater number of false price reversals, particularly on the shorter time frames.

Anyway the point is that divergence trading is one of the most profitable ways of trading the currency markets because these easily identifiable price patterns provide you with strong clues that a price trend is coming to an end. Therefore there are decent profits to be made by trading the subsequent price reversals, and the great thing is that it's a fairly low risk strategy because you can place your stop loss just above the most recent high just in case it happens to be a false reversal.

by: James Woolley

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