Divergence Forex Trading Strategy

The Divergence forex trading strategy is a mechanical trading system that is based on classical bullish or bearish divergence.

It is often said that divergence is a leading indicator, and it is incorporated into this strategy to help traders with a low risk method to buy near the bottom and sell near the top.

Chart Setup

MetaTrader4 Indicators: DiverStoch.ex4 (default setting), Fisher_Yur4ik.ex4 (default setting)

Preferred Time Frame(s): 1-Minute, 5-Minute, 15-Minute, 30-Minute, 1-Hour, 4-Hour, 1-Day

Recommended Trading Sessions: Any

Currency Pairs: Any pair

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Buy Trade Example

Fig. 1.0

Strategy

Long Entry Rules

Initiate a buy entry if the following indicator or chart pattern gets displayed:

  1. If the DiverStoch.ex4 custom indicator forms a classical bullish divergence as seen on Fig. 1.0, where price forms a lower low (depicted by the solid descending line) and the indicator within its window displays a higher low (depicted by the solid ascending line), a bullish trend is said to be underway, hence a buy trigger.
  2. If the lime histograms of the Fisher_Yur4ik.ex4 custom indicator aligns above the 0.00 signal level, price is said to be pushed to the upside i.e. a trigger to buy the asset of choice.

Stop Loss for Buy Entry: Place stop loss 2 pips below support.

Exit Strategy/Take Profit for Buy Entry

Exit or take profit if the following holds sway:

  1. If the DiverStoch.ex4 custom indicator forms a classical bearish divergence, it is a pointer of a possible reversal i.e. a trigger to exit or take profit at once.
  2. If the red histogram of the Fisher_Yur4ik.ex4 custom indicator aligns below the 0.00 signal level during a bullish trend, it points to bulls exhaustion in the market, hence an exit or take profit is recommended.

Sell Entry Rules

Enter a sell order if the following rules or conditions holds sway:

  1. If the DiverStoch.ex4 custom indicator forms a classical bearish divergence as illustrated on Fig. 1.1, where price forms a higher high (depicted by the solid red ascending line) and the indicator within its window displays a lower high (depicted by the solid descending line), a bearish trend is said to be in the making, hence a sell alert.
  2. If the red histograms of the Fisher_Yur4ik.ex4 custom indicator aligns below the 0.00 signal level, price is said to be pushed to the downside i.e. a trigger to sell the asset of choice.

Stop Loss for Sell Entry: Place stop loss 2 pips above resistance.

Exit Strategy/Take Profit for Sell Entry

Exit or take profit if the following indicator or chart pattern takes precedence:

  1. If the DiverStoch.ex4 custom indicator forms a classical bullish divergence, it is a pointer to a possible reversal i.e. a trigger to exit or take profit at once.
  2. If the lime histogram of the Fisher_Yur4ik.ex4 custom indicator aligns above the 0.00 signal level during a bearish trend, it points to weaning bears power in the market, hence an exit or take profit is recommended.

Sell Trade Example

Fig. 1.1

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About The Trading Indicators

The Fisher_Yur4ik custom indicator is an oscillator that signals bullish or bearish price pressures when its colored histograms are aligned above or below the 0.00 signal level respectively.

The DiverStoch.ex4 indicator for MT4 is a divergence based on a standard Stochastic.

It is deployed in spotting divergences.

Once divergence are being spotted, it is a signal of an impending trend reversal and goes further to highlight the underlying strength or weakness that might not be easily spotted on the activity chart.

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