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Hello traders friends!
Divergence, although not an accurate tool, is nevertheless a very important part of technical analysis , allowing you to get a more complete picture of the current market situation. As they say, it is better to be fully armed, and the ability to determine divergence on the chart will allow you to subsequently make better trading forecasts. Moreover, binary options are very flexible in terms of choosing trading tactics based on technical analysis.
What is divergence
In simple terms, divergence is divergence. As a rule, this implies a discrepancy between the price and the indicator readings . Divergence is one of the first signs of a weakening trend, allowing early detection of a potential market reversal and taking appropriate action.
Divergence is bullish and bearish. In both cases, we need to identify at least two coincident extremes between the price chart and the indicator reading.
A bullish divergence is preceded by a downtrend. In a bullish divergence, two consecutively declining lows on the price chart correspond to two successively increasing lows on the indicator chart. This formation indicates a potential trend reversal.
The number of coinciding extremes characterizes the signal strength. A pattern of three or more extreme points in a row is already an important signal for a reversal. Since binary options are very sensitive to the choice of expiration time , try not to underestimate this parameter in order to make a profit faster – the effect can be just the opposite.
In general, it is a fairly flexible tool that can be used both to identify reversals and to continue an existing trend. Therefore, the use of divergence in the binary options market is not limited to only one type of signals, but allows you to create many diverse strategies .
What indicators to use
We have already found out that the easiest way to identify divergence is based on the indicator readings. Which indicator to use for this task is already a matter of taste, almost any oscillator or trend indicator will do. For example, traders often choose MACD and OsMA for higher timeframes, and RSI and Stochastic for lower timeframes . If you like binary options with short expiration times, you should look towards oscillators with short periods.
The principle is generally the same for any technical indicator. For example, in this case, the two lows on the MACD-histogram diverge from the price movement of the instrument. That is, we are dealing with a bullish divergence.
The RSI also showed the presence of divergence. But, it should be borne in mind that different indicators can display different signals. Therefore, for greater reliability, nothing prevents you from simultaneously using the readings of several indicators. By summing the score, the overall signal strength can also be determined.
Having understood the principle of defining divergence, you will not be able to forget it any more, and will be able to determine divergences “by eye”, without additional marking. At first, in order to make it easier for yourself, do not hesitate to make detailed markings, marking all extrema and their direction using trend lines. In the examples below, we will consider just such a way to search for divergence, using a stochastic oscillator.
In order to determine the presence of divergence, we first need to identify the indicator extremes. It is easy to do this in history, but in real time it is somewhat more difficult. The main rule is to look at the indicator readings only by closed candles. Only by a closed candle can we speak with confidence about the presence or absence of an extremum.
So, only after waiting for the candlestick to close and having determined on the chart the divergence of the indicator’s two lows with the lows on the chart, we can consider the opportunity to enter the market. At the same time, we always enter in the direction of the indicator, not the price, this is important! Be sure to choose the expiration time no less than the shape’s range. Since we are trading against the trend, the price may simply not have enough time to reverse, and this should be taken into account. In fact, the expiration time can even be increased if the market is particularly sluggish.
When opening a bear trade, we look at the highs of the readings. In this case, the second high of the stochastic is below the first, while the price continues to rise. The indicator tells us about the exhaustion of the current trend, which means it’s time to look for an opportunity to buy a Put option. The expiration time, again, is equal to the figure.
Do not forget that the very fact of divergence is often not an accurate signal for a price reversal. However, divergence is an important indicator that signals a high probability of a trend reversal. At a minimum, this should be taken into account and not entered against the signal. It is more reasonable to use divergence in conjunction with other signals. Definitely a good basis for building your own vehicle.