Handling Bearish divergence in Forex Trading

Handling Bearish divergence in Forex Trading

Submitted by adil on Fri, 12/12/2014 - 15:41

Most of the experienced traders recommend that the best way to earn money in the financial market is to buy when prices are low and sell when the prices are high. There are a number of indicators which have been devised by experts and brokers, which can be used to predict these ‘highs and lows’. Technical traders use oscillators such as the Stochastic Indicator and Relative Strength Index (RSI) as leading indicators. These indicators attempt to identify points where the market is either overbought or oversold and likely to reverse and curve back up. The most commonly used indicator for this is the Moving Average Convergence Divergence (MACD). Every time the traders are looking for an opportunity to bet against an upward trend, bearish divergences can be used as a spat to start entering short positions.

What is Bearish divergence?
Bearish Divergence compares the movement of prices to movement usually of an oscillating or ranging indicator. As the new price tops are rising, an indicator's bottoms are not indicating weakness in the trend. Experienced traders are of the view that Bearish divergences allow traders to sell at highest levels before the downside reversal is seen. This fact cannot be denied that when prices are high, traders can enter sell positions and earn maximum gains.

What happens during Bearish divergence scenarios?
In bearish divergence scenarios it is essential that you keep a close check on the Moving Average Convergence Divergence (MACD). You must look for price to make new highs and you will notice that the MACD indicator is failing to make a new high during bearish divergence. The figure below provides an excellent example of when a bearish divergence is looking at the Relative Strength Index (RSI).

It can be easily comprehended from the figure that the prices are rising in an upward trend while an apparent bearish divergence develops in this chart over a period of nearly one year. When a bearish divergence is seen, traders are advised to enter into sell position. They are of the view that there is a likely chance that the prices may decrease in future. This can also provide excellent trading signals in terms of entry levels, as traders will generally be able to enter into sell positions while prices are still near their peaks. 

How to handle Bearish divergences?
The best time to use the MACD indicator is when divergences are traded. One of the most outstanding benefit of trading divergences is that give traders the access to pinpoint the potential trend reversals. This is done well before time, as most of the market is unaware that the previous trend has extended more than its fixed duration. The best strategy is to buy low, sell high and trade with MACD divergences, as this provides excellent opportunities to potential traders. Experienced traders always advise that divergences should only be used in conjunction with signals generated from price are an exceptionally strong indicator of a reversal and can provide you with excellent trading opportunities.