Trading with divergences has increase our percentage of successful trades lately. If you have been following our trade signals so far you might wonder, what exactly is divergence? We keep mentioning about divergences in OSMA, MacD in our signals and analysis.

Firstly, let us google what is OSMA and MACD in theory.

OsMA

OsMA, also known as the Oscillator of Moving Average, is usually the distinction between the oscillator and the smoothing of oscillator. Then the signal line of MACD is used for smoothing and the basic line of MACD is used as an oscillator.

If OsMA stops decreasing and starts increasing, it is the signal for buying. If OsMA ceases increasing and starts decreasing its’ the signal for sale. The discrepancy of the price and OsMA is a trustworthy signal.

MacD

MacD, known as Moving Average Convergence-Divergence is one of the simplest and most effective momentum indicators available.

MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average.

As a result, MACD offers the best of both worlds: trend following and momentum. MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge.

Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals. Because MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels.

Theories are just theories, lets take a look at some illustrations to understand divergences better.

Bullish divergence happens when the price on the charts forms a lower low while Osma or MacD forms a higher low.



Bullish Divergence

On the other hand, bearish divergence happens when the price on the charts form a higher high while Osma or MacD forms a lower high.



Bearish Divergence

How to trade divergences?

Alright now since we have equipped you with the divergence spectacle that allows you to spot any divergence easily. The question here is how are you going to use this ability in real battle.

Warriors at ForexGump only trade divergence when there is trend line break or when there is potential reversal pattern formed.



Trendline Break w/ Bearish Divergence



Trendline Break w/ Bullish Divergence

Easy? Note once more that divergences is only confirmed after a trendline break or a completion of reversal pattern.

Now to practice your skill of spotting divergence, you can do so by looking at past data!

Start spotting setups like this and mail them to us for verification.

We are more than willing to verify the setups for you.