SIMPLICITY OF DIVERGENCE

Wisdom is simplifying complicated things while foolishness is complicating simple things.

Sammy Forex 

TABLE OF CONTENTS

• DISCLAIMER
• INTRODUCTION TO DIVERGENCE
• WHAT IS DIVERGENCE 
• TYPES OF DIVERGENCE
• HOW TO SPOT DIVERGENCES
• HOW TO TRADE DIVERGENCE (my type)
• WHEN TO TAKE YOUR PROFITS
• QUICK GUIDE ON YOUR TRADE SETUP
• WHAT TO DO THE MOMENT PRICE COMES BACK TO BREAK THE HORIZONTAL LINE
• MARKET MAKERS (BIG BANKS) AND THEIR OBJECTIVES
• THE 90-90-90 RULE
• FINAL WORDS (SUMMARY)

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INTRODUCTION TO DIVERGENCE

Forex is a business that requires a solid strategy that can guarantee at least a 50:50 result when trading. Every business in the world has competitors; the strategy you apply in a situation like this, determines the number of patronage you will get. So also do forex! As liquid as forex, it just has two activities that can be performed i.e. BUYING AND SELLING. Outside this, we have no other thing that can be done in the forex market. Your competitors at anytime you decide to enter the market towards a particular direction, are those who also at the same time want to enter into the same market with you but toward a different direction. This is where a reliable strategy comes in; whoever has the best strategy at this scenario, wins the patronage from the forex market.

Divergence on its own is a key factor when it comes to trading because it has to do with the market turning points or its continuation aspect. Mastering divergence alone can give a trader a huge advantage over the market without you complicating things trying to learn all that concerns forex trading.

 Everything about divergence is awesome ranging from its risk to reward ratio down to whatever you may think of. Divergence tells the presence of the Market Makers (the Dealers, Big Banks), and their intentions. As we proceed, I will show you what really happens in the market.

But nevertheless, depending on how traders use divergence, it is a strategy that can offer you up to 70-80% win rate. Isn’t this awesome? I mean when combined with your solid Money Managing skills. But there is a problem when it comes to using this strategy; most traders precede striking deals thinking they have seen what they had been waiting for (divergence) but end up getting stopped out before the main turning or continuation takes place.

 I will show you exactly when to enter the market the moment you spot a divergence and I will also show you what to do the moment price comes back and closes above/below your entry point. Remember I said divergence can offer you up to 80% win rate depending on how you use it as a trader so this is not the Holy Grail strategy you have been looking for because you will definitely lose some money using this strategy.

WHAT IS DIVERGENCE

Divergence is simply a point of separation between two or more things or people as the case may be. In forex, we can say it is the conflict that occurs between the price (chat) and the indicator (oscillators), it is a difference in price to the oscillator. All oscillators are generally meant to follow price up and down, but at some point, separation always happens between this guys (price & oscillator); so at any time you witness oscillator doing a different thing from what price is doing, that is what we call a divergence. 

You cannot trade divergence without using an oscillator; so if you are a type that hates using indicators, this strategy is not for you, but you can proceed reading if you are thinking of giving divergence a try.

All you need to trade divergence effectively is just an oscillator(s) below your chat (STOCHASTIC, RSI, CCI, MACD etc, any oscillator at all), I personally use the RSI and the STOCHASTIC to find divergences.

As we proceed, you will learn the types of divergences and how to trade them using the entry and exit strategy I will show you. You don’t have to let the market hit your stop loss before getting out of a trade that won’t favour you. This strategy tells you when to get out immediately the signs of losing comes. I hope this information will help you too to really limit your losses just as it limits mine.

                   TYPES OF DIVERGENCE

All the 4 types of divergence in the table below are shown in this diagram. This happens to be one of trades I took back to back and won all using divergence.

This was a combination of trend lines (channels) with divergence; remember I made mention of support and resistance earlier, this is one of what I meant.

The table below shows the types of divergence

REGULAR DIVERGENCE 

HIDDEN DIVERGENCE

These are the four (4) types of divergence. As we proceed, I will explain each of the divergence and show you the slight difference between them.

HIDDEN DIVERGENCE: 

This tells you of a possible trend continuation. For an uptrend, hidden divergence is simply connecting two swing lows from the point of difference on both price and oscillator because you are aiming to buy and continue the uptrend.

While for a downtrend, hidden divergence is connecting swing highs to continue the downtrend.

REGULAR DIVERGENCE: 

This is simply the opposite of the Hidden Divergence. It has to with you connecting the swing highs on price and oscillator. This is a possible change in trend signal.

For an uptrend, regular divergence is connecting swing highs for reversals while for a downtrend, regular divergence is connecting swing lows for downtrend reversal.

HOW TO SPOT DIVERGENCES?

As one who is looking for divergence trade setups, first ask yourself of the trend you looking at; this will help you know the type of divergence to expect. But whatever the case may be, for an uptrend, zoom out your chat, glance through the swing lows, trace from the beginning of the chat to the current market price and mark out corresponding swing lows on price and oscillator with differences/opposites as shown in the diagrams above.

However, for a downtrend, follow same steps above but this time, focus on spotting and connecting swing highs.

Note: Any time the swing highs are connected, it means you are looking to go shot (sell). The reverse is the case when it comes to you connecting the swing lows which indicates you are looking to go long (buy).

Whenever you are connecting swing highs, the lines used to connect serves as a resistance line and from what you have leant concerning support and resistance level, you are not suppose to buy at the resistance level; so at any point you connect the swing highs due to divergence, you are simply looking to shot (sell). So also when you are connecting the swing lows, the lines then serves as the support and no one is advised to sell at or near the support. So connecting swing lows, you are simply hoping to buy.

HOW TO TRADE DIVERGENCE

This is the area most traders miss it. They understand everything that concerns divergence but never understand the best time to execute their order, so they easily get stopped out before the market tends to respect their divergence signal. You should understand that divergence is widely used by millions of traders across the globe and because the Dealers are aware of this, they always go for stop hunting 90% of the time before actually respecting the divergence signal. So if you are one that goes about executing orders the moment you spot a divergence, you will definitely fall victim of this over and over again until you stop such approach. 

Nevertheless, I will show you what actually happens in the market and how to wait and execute your orders at the right time, when to get out of a losing trade as quick as possible before you are automatically stopped. I will also show you how to set your profit targets for every trade; I made it simple for the purpose of this book.

However, it all depends on the type of trader you are. So understanding who you are in the forex market i.e. the type of trader will go a long way. We have different types of traders involving long and short term traders. You know yourself and the timeframe you have been using to search for signals. As for a newbie, you must know your boundaries in this business. Not all traders find it simple to hold trades over the night while some take delight in holding trades for days, weeks, months, and even years; so analysis yourself to see where you fit in.

Take a careful look at the above table and use it to scan yourself to know where you fit in because that is where it all begins; by knowing your area of strength. Divergences occur in all timeframes so you are not missing out on anything. The worst thing you will do is to be a scalper today and tomorrow you are a short term trade and the next day you are a position trader; this way, I can tell you that you haven’t discovered yourself in this area of the market and you will never be comfortable with the outcomes of your trades. Identify your strength and weakness from the table above and trade only signals generated from your timeframe. Although the truth is; divergence is more reliable when generated from higher timeframes. 

The next step is to insert an oscillator into your chat to enable you spot divergences. We all know that oscillators are said to be leading indicators that predicts possible price directions before they actually occur; also, it is also generally understood that the market moves in legs forming structures. These legs are what the Dealers use to induce traders to take trades at the wrong time and mostly towards the wrong direction. Understanding what am going to show you now, will help you at all times you spot a divergence to wait for the right time before executing your orders.

There is a horizontal trend line I always draw and wait for price to break after spotting divergences before entering any trade. This step will take you back to your understanding of all the types of divergences we spoke of earlier. This horizontal line I always draw automatically tells me of what is going on in the market. It tells me there is a strong level right on that point of divergence. Checking back from history, you will see price hit that line/level again and again. I will show you with screenshots how this lines are been drawn after spotting divergences. 

Before we proceed, from the above table consisting of the types of traders, let us all assume we are short term traders; so our search for divergence will be on the 4hour timeframe throughout...

Note: for the purpose of better understanding, I will be using symbols on the screenshots to explain what I mean…

ARROWS: indicates point of divergence (difference) in price and oscillator.

TICKS SYMBOLS: indicates your suppose entry point.

STOP SIGN (red): indicates the level you are expecting price to break before you execute.

HORIZONTAL BLUE LINE: just reveals the presence of a strong level. Remember it is called level because prices have tested that point two or more times.

These are the four (4) types of divergences we discussed earlier in this book. Whatever divergence you spot out there any day must fall into one of these types. It must look like one of the diagrams above. Now you see how simple it is to trade my type of divergence? It is just a matter of understanding how to place your horizontal line after spotting the signal. From the above chat and many more that you might back test, you see how awesome your entries were. The moment you executed your order(s), you started running in profits without delay just because you waited for the right time. 

In my previous book, I quoted that timing is one of the most if the most important things when it comes to market executions. I made mention of price hitting the horizontal line / level right? Now watch the screenshots; even on the oscillator you will see how price kept hitting and reacting strange while approaching those lines; right from the history even to the future, it kept hitting and reacting. Study those four (4) types of divergences shown on those screenshots, examine how the horizontal lines are drawn, on your own, do same thing and then see what happened the moment price broke the horizontal line.

Note: Nothing should make you execute your order when price has not broken the horizontal line. That line (level) is their final say; meaning when they break it, 90% of the time, there is no going back. Only 10% time will you see them come back to break that line again. So always wait for price to break line before taking your trades. No sharp move should make you trigger your order except it has closed above/below your line (level); as a matter of fact, stay away from fast moving candles except you are already in a trade. Such moves are to induce traders to take trades and at the end of the day, they are locked and abandoned.

Life in general is all about keeping things simple. No one goes far always doing things in a complex way. So also as a forex trader, you must learn to simplify your strategy in order to live happy with it. If you must succeed in trading, you should gather all the complex information you have about forex trading and see how you can make them simple; that is wisdom! In my own case, I gathered almost all the information I have about trading to make it this simple.

I don’t waste a minute analyzing any chat. In less than 5seconds, I am done analyzing any pair. Once you understand divergence, you do not need to draw line all over your chat like on the screenshots above; with your eyes you can spot it from a distance. You don’t have to spend more than 30 seconds for beginners otherwise 5 or 10 seconds is enough to see what you are looking for in the market. 

The truth is; if divergence is not there, then it is not there and you can’t make it to be there just because you want to trade at the moment, simply move to the next currency pair. If you don’t see any signal from all the pairs in your market watch, no problem, you can’t kill yourself; there is no trade for you for that day close your PC and do something else. Or for scalpers, day traders and even the short term traders, you can simply wait for the next session in the market; maybe you didn’t see any signal in the London session, wait for the US session after which you can close your PC and call it a day if you still do not find any signal.

QUICK GUIDE ON YOUR TRADE SETUP

- Lunch your chat inserting any of the oscillators

- Scan for divergences on pairs

-Once spotted, check the screenshot above to see the type you spotted 

-Draw your horizontal line just as drawn on any of the screenshots above that happens to be your type of divergence.

- Sit back and relax. Wait for candle/price to break and close above or below the line. 

-You are to execute the moment price breaks and closes below/above the line.

This is simple right? Oh yes! Just two things are important … spot divergence and place your horizontal line. Trade immediately after breakout! You know how to place your stop losses isn’t it? In case you don’t know, I normally tell my students to place their stop losses (SL) above or below the lowest or highest point of that present day.

WHEN TO TAKE YOUR PROFITS

This particular part is completely left for you to decide as a trader; you should have trading rules that you are using as guide and you just have to follow them when setting targets.

But for the purpose of this book, I will show you the two methods I use to take profits. These methods are conventional; any type of trader can use this method to also take profit. I call it trading with the oscillator because I use it to determine when to exit my deals.

1st method (trading with the oscillator)

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Let us assume we took the trade below (USDJPY) from the 4hrs timeframe immediately price broke 109.602 level; from the divergence below, notice were the stochastic is at line 80 said to be overbought. How I do it is simple; I will sell that trade until the stochastic drops to the oversold level, I will only exit when the two lines crosses each other giving a buy signal and breaks the oversold line 20. I will also exit a trade if the stochastic lines just bounced on the oversold line 20 but crosses each other from there giving a buy signal. So from the trade below, my entry was at 109.532, SL @ 109.750, TP was @ 108.716. According to my strategy, this trade was closed because stochastic lines crossed and broke line 20 at the point I marked X. That was a great deal by all standard; almost 1:4 ratios. This is one of the things you enjoy trading divergences. The reward is usually amazing! Just focus on sticking to your strategy and let your strategy focus on making you money. Note: your executions should be immediately after the closure of price above/below the horizontal line; reason is because price tends to move really fast after breaking. So hesitating to execute your trades will leave you chasing them because you might be forced to enter at a wrong time which is not advisable. So let us take a look at another trade below… Here is it but this time it was a buy trade; we got the divergence signal to buy, so we did. Same reason made us to exit this trade at the point of X on the stochastic… the crosses and the line 20 it broke.

Now, I understand some of you will complain of how much money you left in the market due to how high the market later went; but I want you to always remember that nobody knows how far the market will move from its current price and come to think of it, the trade above was almost 1:4 ratio, so there is no reason to grumble over the rest of the moves at the end. Whoever does that is a greedy trader!

Read: Types of Pets 

Read: The different breads of Cats

2nd method

I personally use this method because it gives me a better risk to reward ratio compared to the first. In this method, higher timeframes (4x) bigger than the timeframe that generated the signal, are used to set your profit targets. Now let me show you exactly how I do it.

The 1hour timeframe is where I expect signals from but I don’t just jump in after getting one. What I do is I move up to higher timeframes like the 4hours and the daily and make sure at least one of them is supporting the direction of the divergence signal from the 1hour timeframe. I most times hope to get support from the daily because the higher the supporting timeframe, the bigger the risk to reward would be. Once I get the support am looking for from either the 4hours or daily timeframe, I then step down to the 15mins timeframe to take my entry. Mind you; I don’t just take entries but I wait for the oscillator on the 15mins timeframe to also align with the direction of the 1hour timeframe reason is because I want to get a smaller stop loss. I then move to higher timeframe to set my targets at the next support or resistance levels.

This happens to be a trade I took on the 3rd of February, 2020. The risk in that trade was 10pips but reward was 95pips. The signal was from the 1hour timeframe, entry and stop loss placement was from the 15mins while target was from the 4hour timeframe. More than 17hour of consistent profit before the little pullback. That rally you are seeing on the second leg of that W was as a result of what was going on in the 4hour timeframe. 25-30% of my trades are like this; really massive rewards.

Guys if you follow these two methods, you will always experience consistent profits. I said something about pullbacks in my previous book on how to manage trades. Yes and am going to repeat it here; don’t just watch them occur. Remember we are dealing with really tiny stop loses and we can easily get stopped if we waste time in the market. Yes we know pullback happens in the market but the truth is nobody knows how far the pullback will occur; what you are thinking of to being a pullback can end up becoming a total change in trend and at the end of the day, you end up losing all your profits. When it comes to how far a market will go, nobody has any idea on that. So to avoid this as a divergence trader, trade with the oscillator that showed you the divergence signal; get out of a trade the moment the oscillator finish selling or buying the signal it generated. It doesn’t matter if the trade in question has gotten to your target or not; in as far as the oscillator that generated the signal has finished doing its work, close your deal. You can’t finish everyday with trades hitting your expectations; just follow your oscillator and that’s it. There is nothing bad winning small especially if you are winning consistently. Most times you might be lucky to get another divergence signal again back to back, close the one already in profit and then take the new signal to complete your target for the day; that’s if you feel safe emotionally to do so.

Don’t be greedy enough to let your winning trades turn losses. This is because divergences occur every day and in almost all the pairs in the market because no pair in the market will move up or down forever. So getting a signal is never an issue you can trade as many pairs as you want after mastering how to trade one, two or three. But the thing is; just take little profit you have gotten so far as the signal gets exhausted. It is true that the market can later continue your direction after little pullback and you must have left so much money on the table; but remember… nobody including you knew it would react that way. If you ever said it and it happened, don’t get carried away because it was just accidental.

Keep things simple while trading… take your profit the moment your oscillator gets to the overbought zone for a buying trade and when it gets to the oversold zone for a selling trade and free yourself.

Price action and breakout traders can as well use divergence to determine their breakout direction after spotting a chat pattern. The power of divergence can tell which direction the breakout will actually occur. Divergence can also tell you if the breakout that occurred is a fake one or not.

From the diagram below, breakout traders who trade out of the edge were in trouble but divergence traders were at peace. If you as a breakout trader understood divergence, you wouldn’t take the trade below because you would have seen it to be fake. A real breakout doesn’t produce divergence. So at any point you see a divergence after a breakout, avoid it! It’s fake! That breakout will go nowhere sir! They are already aware of what you are seeing so they will go as far as breaking those levels just to induce you to execute your trades.

SUMMARY

Forex on its own is not risky it is the way some of us trade that is risky; more risky is the fact that a trader don’t know why he is in the forex business. In a business that takes away money so quickly from one’s pocket, a zenith level of discipline is required to strive.

Divergence as it is, is not enough reason to execute your trades, it is seen as a leading indicator and so should not be traded alone except when combined with other tools like Ms and Ws at or near support or resistance levels, candlesticks patters like the rail road tracks (RRT), cord of wood (COW), morning/evening stars, shift candles (known as engulfing candles) usually 10+ pips, trend lines, Fibo levels, etc… divergence has a high probability of winning when combined with this tools.

Divergence is amazing when used to trade because it enables you to begin a possible trend most of the times. While other traders are thinking of joining trends, you are actually beginning it.

Try to simplify whatever strategy you use so it doesn’t stress you on the long run. When you simplify your strategy, you live happy with it and it will never be bordering no matter how long you use it.

Someone defined forex as the transfer of money from inpatient traders to the patient ones. After spotting a divergence, don’t just jump in; wait for it to be fully developed. Once spotted, place your horizontal trend line the way we did on the above screenshots and wait for price to break them. 

While waiting for price to break this line, other tools can be used in conjunction with your signal for confirmation. Don’t always hesitate to execute your deals the moment the market presents an opportunity before you. Mark Douglas said something… he said “when you hesitate to execute your trade after it meets all your criterias, you are simply telling yourself or whoever is around you that you know what the market will do next”. This saying is true. When you hesitate to take your trades after an opportunity is presented to you; then you are telling us that you know what will happen next in the market. But that is not true! Nobody knows what the market will do next and so if you understand this, taking trades when all criteria are met will not be an issue.

After all said and done, success in trading is never easy; if it were, everyone will be a millionaire. It is more like trying to succeed in every other field in the world. It requires a minimum of 10,000 concentrated hours to become great at anything in life including forex trading. Spend your time with charts, see how you can learn something new every day and put your new lessons into practice to see how they work. Definitely you will come across ups and downs in your trading career even while seeming to do the right things at all times but the truth still remains that you just have to keep doing them in your trading and a time will come where same things that weren’t working right will start working right leaving you with nothing but success.

The hardest risk to manage is the bad habit pattern of the trader himself. Many of us as traders, if we can change from our bad habit while in the market, two years are too much to become a millionaire in any currency of our choice. Bad habit has left many traders frustrated and financially empty.

Also understand that great and lasting things don’t just appear to anyone seeking them; such things passes through obstacles which are your ups and downs during trading as a trader making it one of the laws of nature. But your ability to see through these times of drawdown will make you even stronger and a success at the end. The reason I am saying this is because “no matter the skills, talent or efforts, some things just take time to arrive; you can’t produce a baby next month getting 9 women pregnant today”.

After all said and done guys, trading is never easy. It takes skills and time to actually start getting what you want from the market. The more time and concentration you put into learning, the faster you come out of the newbie’s list of traders into the list of professional traders, so make your choice and GOOD LUCK to your trading career