How to Avoid Mistakes When Using Trading Divergence
After knowing how to use TRADING DIVERGENCE as a forex trading strategy, we also need to know how to avoid mistakes when using it too and this is our effort to minimize the risk, bro :). Still remember the risk management !
Good! let’s discuss what risks can occur when we use this tool when trading forex. The risk that can occur is that we are too early to open a trading position so that it can be a signal that we think is correct so that our trading position was not in line with market movements. To avoid this means we need confirmation in this case is the formation of crossover, Overbough & Oversold, and a breakout on the trend line.
The boring thing is to wait but waiting here can make you a lucky person. When you are sure that a SELL signal from the divergence strategy will be formed, do not rush first to open a trading position, wait for the confirmation in the form of a crossover between the fast-reacting line and the slow reaction to the price in the oscillator .
On the chart above the price has formed Lower High (LH) when the oscillator begins to form Higher High (HH). And if we go back to the previous lesson we know that this is a Bearish Hidden Divergence signal and the right time to open a SELL (SHORT) position.
As we discussed earlier that don’t be too lustful! please wait for a few moments, let the oscillator confirm beforehand that the signal formed is in accordance with your prediction.
And after a pair of candlesticks is formed the oscillator (Stochastic) forms a crossover and ensures that the price will continue to move down (downtrend) and this is the right time for you to open a SELL (SHORT) position.
So the point here is SABAR! do not because at a glance you see that the BUY or SELL signal has been formed then you hurry to immediately open a position. Wait first for a confirmation signal indicating that your decision is correct to open a BUY or SELL position.
Awaiting the Formation of Exit from Overbought or Oversold Areas
Again, the same as the previous lesson, that you are asked to WAIT! that is patiently waiting until the oscillator (Stochastic) comes out of the Overbought or Oversold area which will then be used as confirmation. Do you still remember overbought and oversold? if anyone forgets or doesn’t know, please read the previous lesson 🙂
When the oscillator (Stochastic) has formed a crossover and exits the overbought or oversold area, this is the right time to open the position.
Let’s just say you are looking at a graph and notice that Stochastik has formed a new bottom while the price has not formed as shown below.
If you rush to open a BUY position just because Stochastic is already in an oversold area and has just formed a crossover then you will experience a loss because it turns out the price is still continuing its downtrend journey.
If you patiently wait and are not in a hurry, with the divergence coming out, you will not experience losses like the above.
Draw Trend Line on Momentum Indicator
Maybe this is an unnatural thing that is drawing a trend line on the momentum indicator because we usually draw a trend line in the price movement that has been formed. But this turned out to be a good trick for determining decisions in forex trading.
Keep in mind that this trick will only work when we are seeing a trend reversal or breakout. When you draw a trend line in the price movements of a currency pair, please also draw a trend line on the indicator as shown in the following figure.
As we can see that both price movements and momentum indicators (Stochastic) both break which means breaking the trend line and this indicates that there will be a reversal.
How is it bro? I hope you can easily learn this to avoid mistakes when using the DIVERGENCE strategy especially regarding timing of entering the forex market.