How NOT to Get in Too Early Trading Divergences
You may have your finger on the button ready to place a trade the moment that you believe you see a trading divergence appear on your screen. While it may be tempting to want to pull the trigger as soon as you believe a divergence has appeared, you should hold off.
You don’t want to enter a trade too early. Even small losses that you accumulate from entering divergences too early can add up to an account that has gone bust. We want to show you a few tricks that will hopefully keep you away from having that possibly happen to you.
Wait Until You See an Indicator Crossover
This is a rule that you should probably always follow when trading divergences. Basically, it just means that you are waiting for the indicator to crossover before you can assume that the momentum of your trade has stalled and you are ready to trade the divergence
Trading this way does mean that you get in on the trade a little later than you might have otherwise, but it also reduces your risk as well. It is a trade-off that you might be willing to make simply because you would prefer to minimize your risks to the greatest extent possible, and there is nothing wrong with that.
When you see the Stochastic (or whichever indicator you happen to be using) crossover, you can safely assume that the pair that you are watching is likely to take a tumble as well.
It will follow the pattern of the Stochastic and decline in value. If you had gotten short the pair because of the crossover, then you may make a significant amount on the trade.
Wait Until the Indicator Moves Away from Overbought or Oversold Zone
Waiting until the indicator has moved out of overbought or oversold territory serves much the same purpose as waiting for the crossover. The difference is that you will be waiting a bit longer if you wait for it to move out of this territory.
The reason is that it takes even longer for the indicator to catch up and get out of overbought/ oversold territory. However, as you might have guessed, this also means that you are going to have more security in your trade as well.
You are waiting until there is a more extreme form of confirmation, and that gives you extra protection that the trade is likely to work out well for you.
Plot Trend Lines Directly on the Indicator
Generally, you will only draw trend lines on the price action of the currency pair itself, but you may want to consider also drawing trend lines on the indicator if you find that this is helpful in seeing where the indicator has been going.
What you are doing when you do this is creating a line that you can watch for any reversals or breaks in the trend. If the indicator has been trending down, and then suddenly it breaks above your trend line, then there are reasons to believe that you should perhaps change course on your trade and start buying the pair.
These are a few ways that you can check to make sure your assumptions about divergence are correct. If so, then you can act upon those assumptions to make your trades.
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