Forex Options Trading - Divergence Trading

Divergence is a price technical indicator that occurs whenever the live quote and the oscillator a trader is comparing goes in a different and opposite direction. In forex trading, divergence signals if there is an upcoming change in a trend whether in reverse mode or in progress. By observing the divergence, a trader is signaled for a trading opportunity.

There are two types of divergence in currency trading-regular and hidden divergence. Regular divergence happens in two trends. One is when the price creates higher highs when the oscillator says otherwise and the other is when the live quote creates lower lows when the oscillator is not. On the other hand, hidden divergence occur when the oscillator makes higher highs while the price is not and when the oscillator makes lower lows while the live quote is not as well. In a way, regular divergence is the result of changes in the price trend that might happen in the near future while hidden divergence confirms past live quote trends.

In the forex market, once the live quote reach its higher highs while the oscillator turns out to be on the lower highs, it indicates trend reversal from up to down. Same goes when the price reaches its lower lows while the oscillator shows higher lows. Such is an illustration of the classic or regular divergence.

Hidden divergence is somewhat contrary to regular. In this case, whenever the oscillator shows higher highs and the price on its lower highs, the downward price trend is confirmed. Higher lows in price and lower lows in the oscillator is a confirmation of the upward price trend.

The trading system, however, must not be taken as a go signal to enter or exit a trade in the forex market. It acts as mere indicator for a possible profitable trade.