There are many traders who trade divergences. Divergences are created at specific places and therefore make a clean entry possible. When we say clean we mean that there is a specific place and time for divergence to occur which allows the trader to make decisions at that point. Either to enter the trade or wait.

Typically traders who trade a divergence are looking for a trend to reverse itself. They also will include a variety of other indicators to help them decide if the decision is correct.

The analysis we have done confirms what Andrew Cardwell who discovered Reversals, that divergences signal that Reversals about to occur. Many currency traders are completely unaware of Reversals and the power they yield to outperform divergences.

Here is what we know about Divergences and Reversals

Negative or Bearish Divergences signal the occurence of Positive Reversals.

Positive of Bullish Divergences signal the occurrence of Negative Reversals.

Statistically, Reversals outperform divergences. This is true across any time frame and any length of time. The reason is that Reversals signal trends. Divergences signal the retracement of a trend. This means traders are better off trading Reversals.

Today in the chart below I show an interesting way to trade Reversals.

An important criteria that will benefit the trader is to trade with the prevailing trend. Looking back at previous posts in the last few days you will see charts that identify the long-term trend of a currency pair. For example, the long-term trend of the EURUSD on longer charts shows that the trend is down. To maximize results and to take the most conservative trades we are looking for trades that are short the EURUSD. Therefore this means we are looking for Negative RSI Reversals.

In this chart we see a Negative RSI Divergence (purple-dashed) lead into a Positive Reversal (green solid). This Positive Reversal fails. Then we see the emergence of a Positive Divergence (yellow – dashed). This also fails indicating that the momentum of the price movement is ignoring the signals. A second Positive Reversal forms. If we are correct it will fail. If it fails we will be in the money. We set a Sell Stop below this Positive Reversal with the expectation it will fail. It does. The trade goes 60 pips.

Then what happens? We see the beginning of what we would expect, Negative Reversals (red solid). These begin to produce consistent successful signals in the direction of the trend which has momentum. When trends continue Reversals signal new moves in the trend will almost no drawdown.

The advantage to understanding these 4 signals is that they work together to give you a clear picture of how to trade the markets. They also provide clear and concise points in which to enter. It was not until I discovered these 4 signals and their relationship, did I begin to improve my trading skills.

Divergences and Reversals are covered at length in my RSI Fundamentals: Beginning to Advanced eBook available on the site. Also, our proprietary RSI Paint Indicator is available which automatically locates divergences and Reversals for you . You many use any time frame and any currency pair and on as many charts as you would like. The indicator can signal you by email, the screen or text. There are many more inputs which the trader can change to make the settings to their liking. You may email paul@youlearnforex.com with questions.

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