Written by Beckham West

Trying to make small talk with the weird guy in the back of the office on his 4th cup of coffee mumbling to himself about opening and momentum positions? Have no fear, I’ve just happened to devote the last 336 hours of my life to learning a beginner friendly forex trading method known as divergence trading. 

• If you’re not familiar with Forex Trading, Forex Trading is the conversion of one currency into another currency – commonly known as a currency pair. A popular currency pair within forex trading is the USD/JPY pair, in which you are buying the US dollar by selling the Japanese yen. 
  • You do this by buying a foreign exchange contract in which details include a predetermined rate of exchange (money), and a predetermined expiration date for the contract. 
• Using your best analysis of technical indicators and the tick charts current momentum you would buy a foreign exchange contract if you expected the base currency(USD) to strengthen against the quote currency(JPY), and you would sell if you expected it to do the opposite. 

Now I’m sure you envision yourself trading like the big boys but you’ll have to start by acting like the big boys by using logical trading strategies. A popular trading method within the forex community is divergence trading – divergence within forex trading is when the price of an asset is moving in the opposite direction of a technical indicator such as the momentum indicator seen below. 

The big money traders use these patterns of information as a warning that the current price trend is slowly weakening and should be approached with the expectation that eventually the price will change directions. Divergence Trading should only be utilized when indicators suggest a currency is just about to make a higher high or a lower low within a one hour chart time frame or higher. The in between should just be considered noise to a divergence trader. 

Learning Divergence in Three Rules 

1. Don’t bother taking a second look on the graph if you don’t see:
   1. A Higher high than the previous high
   2. A Lower low than the previous low
   3. Double Top
   4. Double Bottom
2. Use multiple indicators to “confirm” divergence like:
   1. RSI (Relative Strength Index)
      1. Measures the speed and magnitude of a security’s recent price changes to evaluate overvalued or undervalued conditions in the price of that security.
      2. It’s good to know that RSI indicates the market is overbought when above 70 and oversold when below 30.
   2. MFI (Money Flow Index)
      1. Measures the flow of money into and out of a security over a specified period of time.
3. Use Nadex to open a practice account with fake money and become consistently profitable prior to Trading real money.
   1. Nadex

How Exactly Do We Trade Divergence?

Can you spot the divergence above? Yes I’m talking to you. Now look again. You’re either thinking “That’s the divergence thingy he was just talking about” or you’re thinking “CODE RED. I REPEAT CODE RED”. Despite which side you’re on, yes the scary little bars indicate a divergence. As well as yes, someone far far away is just about to lose their life savings. Fortunately that happens to not be you because you noticed the RSI indicator consistently carrying the opposite (downwards) trajectory compared to the upwards trajectory of the tick chart. Then you continue to buy a sell contract stating that you would sell one currency against another.

Prior to starting this forex journey, I made the mistake of asking someone who paid off their college tuition through forex trading “What’s the best advice you can give someone just starting out?”. He responded “Want to know the best way to make a small fortune in forex trading?”. I obviously said yes. He then responded “Start with a large one.” It’s important to keep in mind that Divergence in amplitude is simply a contradiction between price and any indicator of your choosing. Like all technicals, it’s merely a suggestion that the price may rise/fall and you use technical strategies in order to look for patterns that give you a higher probability of a good investment.