If you have been trading the forex for any length of time, I am sure you have heard about oscillators. When you combine oscillators and price action, you have a powerful combination of tools that can be very profitable. But did you know that there is a secret to using them that many traders don’t use?
In a normal market, if the oscillating indicator (whether RSI, stochastic, MACD, etc) is making higher highs, this should correspond to higher highs in the price. When an oscillator is making lower lows, the price should be also.
But what happens when the oscillating indicator and the price don’t match?
You have divergence!
Divergence is when, let’s say, the RSI is going lower and lower. But instead of dropping like you would expect, the price is actually going higher. This is a great indication that the currency will be going up.
Price is a real-time indicator, the RSI is a lagging indicator. So when the price is going up, you pay attention to the price.
What? You don’t think this is so special? Well, it is. Because if the oscillator is falling, especially if it is oversold, then you should already be looking for a market turnaround. And when you see divergence while the indicators are oversold, that is almost a guarantee that the price is headed straight up.
The reason that divergence is so profitable is because you don’t have to risk a lot of money to make a lot.
For example, if you see divergence in an oversold indicator, you buy the currency pair and put your stop loss below the latest support. If the market continues to fall, you have just lost a handful of pips. But if the market does what you suspect it will (and it usually does with divergence), then the price will shoot straight up and you will make a bundle!