Divergence TradingDivergence trading, is basically price action measured in relationship to an oscillator indicator. It doesn't really matter what type of oscillator you use. You can use RSI, Stochastic, MACD, CCI, etc. etc. The great thing about divergences is that you can use them as a leading indicator and after some practice, its not too difficult to spot. What if there was a low risk way to sell nearthe top or buy near the bottom of a trend What if you were already in a long position and you could know ahead of time the perfect place to e!it instead of watching all your unrealised gains vanish before your eyes because your trade reverses directionWhat if you believe a currency pair will continue to fall but would like to go short at a better price or a less risky entryThis is what divergence trading is all about.When traded properly, you can be consistently profitable with divergences. The best thing about divergences is that since youre usually buying near the bottom or selling near the top, your risk on your trades are very small relative to your potential reward. Just think higher highs and lower lows. If price is making 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 "#T, that means price and the oscillator are diverging from each other. $ence the term, divergence. There are TW# types of divergence%&. Regular'. HiddenRegular Divergence( regular divergence is used as a possible sign for a trend reversal.If the price is making lower lows )**+, but the oscillator is making higher lows )$*+, this is considered regular bullish divergence. ,-./*(, 0I1-,.-"2-3,I2- ***ower lows#42I**(T#,$* $igher lows5/Y,-./*(, 5/**I4$ 0I1-,.-"2- If the price is making a higher high )$$+, but the oscillator is lower high )*$+, then you have regular bearish divergence. ,-./*(, 0I1-,.-"2-3,I2- $$ $igher highs#42I**(T#,*$*ower highs4-**,-./*(, 5-(,I4$ 0I1-,.-"2- Hidden DivergenceA hidden divergence is used as a possible sign for a trend continuation. If price is making a higher low )$*+, but the oscillator is making a lower low )**+, this is considered hidden bullish divergence. HI00-" 0I1-,.-"2-3,I2- $* $igher lows#42I**(T#,** *ower lows5/Y$I00-" 5/**I4$ 0I1-,.-"2- If price is making a lower high )*$+, but the oscillator is making a higher high )$$+, then you have hidden bearish divergence.$I00-" 0I1-,.-"2-3,I2- *$*#W-, $I.$#42I**(T#, $$ $I.$-, $I.$4-**$I00-" 5/**I4$ 0I1-,.-"2- How to Trade Divergences$eres how you could trade divergences%Divergence Tpe!rice "scillator TradeRegular Higher High #ower High$%## Regular #ower #ow Higher #ow&'( Hidden Higher #ow #ower #ow&'( Hidden #ower High Higher High$%## 0ivergences act as an early warning system alerting you when the market could reverse. 6or e!ample, if bulls have steadily pushed -/,7/40 higher, the appearance of divergence between price and indicator could mean that bulls are running out of gas and price will soon fall 3lease keep in mind that I use divergence as an indicator, not a signal to enter a trade8 It wouldn'tbe smart to trade basely solely on divergences as too many false signals are given.Its not &99: foolproof, but when used as a setup condition and combined with additional confirmation tools, your trades have a high probability of winning with relatively low risk.#n the flip side, I think it is ;ust as dangerous to trade against this indicator. If you're unsure about which direction to trade, ;ust hold and wait it out on the sidelines. 0ivergences dont appear that often, but when they do appear, itd be worth you to pay attention. ,egular divergences can help you collect a big chunk of profit because youre able to get in rightwhen the trend changes. $idden divergences can help you ride a trade longer resulting in bigger/4T draw a line connecting the two highs on the indicator as well. 0itto for lows also. If you drew a line connecting two lows on price, you>/4T draw a line connecting two lows on the indicator. They have to match8/.The highs or lows you identify on the indicator >/4T be the ones that line up 1-,TI2(**Y with the price highs or lows. 0.0ivergence only e!ists if the 4*#3- of the line connecting the indicator tops7bottoms 0I66-,4 from the 4*#3- of the line connection price tops7bottoms. The slope must either be% (scending )rising+ 0escending )falling+ 6lat )flat+ 1.If you spot divergence but price has already reversed and moved in one direction for some time, the divergence should be considered played out. If the opportunity has passed this time, (ll you can do now is wait for another swing high7low to form and start your divergence search again. ).0ivergences on longer time frames are more accurate. You get less false signals. You will also get less trades but your profit potential is huge. 0ivergences on shorter time frames will occur more fre?uently but are less reliable. 6or e!ample, look for divergences on &