What if you were already in a long position and you could know ahead of time the perfect place to exit instead of watching your unrealized gains, a.k.a your potential Aston Martin down payment, vanish before your eyes because your trade reverses direction?
What if you believe a currency pair will continue to fall but would like to short at a better price or a less risky entry?
Well guess what? There is a way! It's called divergence trading.
In a nutshell, divergence can be seen by comparing price action and the movement of an indicator. It doesn't really matter what indicator you use. You can use RSI, MACD, the stochastic, CCI, etc.
The great thing about divergences is that you can use them as a leading indicator, and after some practice it's not too difficult to spot.
When traded properly, you can be consistently profitable with divergences. The best thing about divergences is that you're usually buying near the bottom or selling near the top. This makes the risk on your trades are very small relative to your potential reward.
Cha-ching!
Higher Highs and Lower Lows
Just think "higher highs" and "lower lows".
Price and momentum normally move hand in hand like Hansel and Gretel, Batman and Robin, Serena and Venus Williams, salt and pepper...You get the point.
If price is making higher highs, the oscillator should also be making higher highs. If price is making lower lows, the oscillator should also be making lower lows.
If they are NOT, that means price and the oscillator are diverging from each other. And that's why it's called "divergence."
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