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I will begin by explaining what is the divergence? It is considered a very effective tool for Forex. Divergence occurs when prices are high and low in a definite direction in the Forex market, while an oscillator-type indicator shows a direction opposite to the trader notes in prices. In other words, or in simpler terms, the divergence arise when comparing the price movement with some technical indicator. Divergence is considered important signals that are recommended for use in conjunction with other indicators to find possible market turns.

In the Forex market, oscillator indicators, allow the trader to observe differences between prices and the indicator, which usually indicate in advance any changes in market trends or simply tell you which the continuation of market is. MACD, RSI and Stochastic are indicators that allow the trader to observe divergences.

There are 2 types of Divergence:
1. Classic or regular divergence
2. Hidden or concealed divergence

The Classical Divergences: They usually signal in advance a possible drastic change in market trend.

Hidden Divergence: These unlike the classic, allow the trader to see in advance which will be the continuation of the market after a time of consolidation.

How to use the divergence?
In the case of classical divergences are used in the following manner and exemplified below:

For example: if prices or a pair has lower low,  while the indicator shows a higher low or just begins to rise, then it would mean a possible change in the bearish market trend bullish. The same can happen in the opposite direction,  if a pair shows a higher high, but the indicator does not make a higher high, it could mean a possible change from a bullish market to bear one.

In the case of hidden Divergence:
For example: if the prices of a pair is minimum or a couple presented very high, while the indicator shows a lower minimum or just start to fall, then this will mean a possible continuation to the market uptrend. The same applies if new highs are shown in the market, and the indicator shows a lower minimum, it will mean a continuation of downtrend.

To earn more money by using the divergence you will need to follow these rules to trade them, as your chances of loss could be reduced:

• To ensure a divergence, you  should always look at market prices as follows:
1. Higher high than the previous high or new high.
2. Lower lows than the previous low
3. Double Top
4. Double Bottom

If you do not find this first, best not to try to find an indicator to buy or see what kind of divergence it is.

• When trading,  it is advisable to draw a line between the highest prices prior to the new height. Do the same from low prior to the new low so you can make your analysis more quickly and clearly.

• If there is a divergence and the market moved or reversed at some point, don’t try do anything about it.Yes this happens and you realize that a divergence occurred and did not see it, wait until the market returns to show a divergence to take the next opportunity.

• Divergences over longer periods are more accurate. You get fewer false signals. At long periods you will have fewer transactions, but the earning potential is greater~In long periods you will have fewer transactions than short periods but the earning potential is greater~{The earning potential is greater at long periods but you will have fewer transactions}~The earning potential is greater at long periods but you will have fewer transactions than in short periods~The earning potential is greater at long periods than short periods but you will have fewer transactions}~At long periods you will have fewer transactions than in short periods, but the earning potential is greater~In long periods you will have fewer transactions than short periods but the earning potential is greater~{The earning potential is greater at long periods but you will have fewer transactions}~The earning potential is greater at long periods but you will have fewer transactions than in short periods~The earning potential is greater at long periods than short periods but you will have fewer transactions}. Divergences in shorter time periods will be more frequent, but are less reliable. Use the differences in periods of 1 hour onwards.

• It is important to always explore, acknowledge and observe carefully the histograms to detect signals in time and never make a move if you are unsure.

• Remember that no investment is risk free and a gauge will help with your trades more effectively when used in conjunction with other Forex indicators.

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Technorati Tags: forex divergence, Forex Indicators, how to trade in forex, how to use divergence, how to use indicators in forex

General forex divergence, Forex Indicators, how to trade in forex, how to use divergence, how to use indicators in forex

What is the RSI INDICATOR?

RSI is an oscillator indicator used for technical analysis and it means relative strength index.

In June of 1978, Welles Wilder developed the Relative Strength Index, providing step by step instructions and full explanations for its use. It caused hundreds of traders to use it and thousands more still use it today obtaining good results.

RSI is an indicator that compares a given time, the individual moves up or down in the market and identify overbought and oversold conditions of a given pair. The RSI Indicator is an oscillator that provides trade signals before they occur in the market.

It means that the RSI allows you to compare the two averages and it is expressed as a percentage. If the average of low and highs are equal, the RSI has a value of 50%, this means that the relative strengths are balanced. However, if the value of the RSI is above 50% it means that there is more rising strength than relative bear strength, and if it is less than 50% it means that there is more bearish strength than bullish.

The RSI is considered to work most effectively in ranging markets (none trending), but you must remember that as any other technical indicator, signals must be confirmed with other indicators for them to work optimized.

Using the following formula we calculate the RSI:

RSI = 100 -     100
______
1 + RS

RS = Daily Average of upward closures / Daily Average of Downward closures

How to use the RSI Indicator?

RSI is characterized by the tendency of prices and moves, and runs from 1 to 100. By using this flag you must set two limits: an upper and a lower one, which mark overbought (70-80) and oversold (30-20) areas.

The RSI serves as an indicator of overbought / oversold values, which happens when it reaches one of the limits that traders program, so it is the line above or below the graph. The reason for this is that you buy when the RSI crosses the oversold boundary and when it comes back up you can sell when the RSI crosses the overbought limit and starts to turn back down.

So, when the RSI line exceeds the 70% value it is considered to have entered an overbought zone. If on the other hand it is below 30%, this means that the value has entered an oversold zone.

Also, in major movements or strong strengths, the RSI Indicator can quickly achieve overbought or oversold values in Forex. Therefore, if we applied the strategy mentioned above when the oscillator reaches the limits of overbought / oversold territory it would takes us prematurely out of a trade.  A trade that has not yet been exhausted or has just begun. In these cases it is better to use the RSI to detect divergences between currency pairs.

The most common configuration for the RSI is to use in a 14 day period, although periods of 9 and 25 days have recently gained popularity. 14 days is recommended because it is more likely to give us real signs, since if you drive a smaller, for example 7 days, they can provide false signals. If, by contrast, uses longer periods, you may lose the real signals that occur within a shorter time period and give late signals but you will have to experiment to get the results you want which mix with your style of trading

The RSI offers 3 types of signals:

1. Divergence
2. Patterns
3. RSI Levels

• Divergence: It shows when the trend has ended or is exhausted and is ready to reverse. Divergence can be divided into bullish and bearish. Divergence provides the strongest signals to trade. This signal presents itself when prices reach a higher high, but RSI indicator does not.In the same way divergence occurs when a pair´s price reaches lower levels, but RSI doesn’t.
• Patterns: This refers to finding and identifying patterns in the indicator, rather than on prices.
• The RSI Levels: RSI measures overbought and oversold levels. It is considered the easiest to interpret and contrary to popular belief this is the worst way to use RSI, because this method provides too many false signals.

What you should NEVER do?

• Never buy when the line drops below 30.  You must wait for it to cross back up.
• A Trader should never sell when the line crosses over the 70 area.  You must wait for it to drop back down.
• Do not trade when the indicator enters the overbought area or over sale, rather do it when you leave those areas confirmed with other indicators.
• Never take decisions on any technical indicator alone.  Wait for other technical confirmations.

Remember that no investment is risk-free and an RSI indicator in Forex will help you most effectively when used in conjunction with other tools of technical analysis.

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Technorati Tags: Forex Indicators, Forex RSI, How to use RSI, How to use RSI indicator, How tu invest in Forex with RSI, The RSI

General Forex Indicators, Forex RSI, How to use RSI, How to use RSI indicator, How tu invest in Forex with RSI, The RSI