The FX5 Divergence MT4 Indicator is forex strategy that scans for the Forex divergence formation for highly accurate bullish or bearish trading opportunities. The definition of a divergence is simple. A divergence is seen when the highs of an oscillator indicator are deviating from the highs of the price action, or when the lows of the indicator are deviating from those of the price action. Usually, both the highs and lows of price action and an oscillator are supposed to move in sync with each other. Wherever there is a deviation in this, this is a divergence.
The divergence opportunities which are traded are the bullish divergence, where indicator lows start to get higher when price action lows are getting lower. We also have the bearish divergence, when indicator highs start getting lower while those of the price action start to get higher.
The principle of divergence trading is that the price action eventually corrects the divergence by moving in the direction of the indicator divergence. By using an indicator like the FX5 Divergence MT4 indicator, the divergence areas are spotted on the charts, allowing the trader to setup the trades accordingly.
The indicator has two components: the trend line component and the histogram bars. The histogram bars are green when in positive territory and red when in negative territory.
FX5 Divergence MT4 Indicator Strategy and Trading Rules
The strategy is to look for when the indicator traces the trend lines that show when the divergence has started to occur. However, the indicator sometimes draws lines that are not appropriate to the strategy. So the trader must be very careful to identify just the lines demarcating the true divergence areas.
Once divergence has been spotted, then the trader must trade in the direction of the initial divergence, as price action will correct itself accordingly.
FX5 Divergence MT4 Indicator Long Entry Rules
A long entry is used to trade a bullish divergence position. The long trade is initiated when:
- The indicator line is shows that the lows are getting higher and the price action is showing lows which are getting lower.
- Extend the trend lines drawn by the indicator manually, then trade the candle bounce off the trend line on the price action. At this time, the amplitude of the indicator bars has started to reduce, showing that the trade bias is shifting to a bullish stance.
Stop Loss and Take Profit for Long Entry
The stop loss is set at a few pips (about 20-30 pips) below the low price of the entry candle.
For the Take Profit settings, there are certain pointers as to where the trader should take profit. These are as follows:
- The amplitude of the green indicator histogram bars has gotten to a peak. Look at the chart and notice that where the Take Profit was set, the green histogram bars of the FX5 Divergence MT4 indicator were actually so high that a reversal or at least a stall in price movement was imminent.
- It is also possible to use a resistance to set the exit point for the trade. If a price reversal candlestick pattern forms, this can also be used as a signal to exit the trade.
FX5 Divergence MT4 Indicator Short Entry Rules
The rules for a short entry are as follows:
- The indicator line is shows that the highs of its histogram bars are getting lower and the price action is showing highs which are getting higher.
- Extend the trend lines drawn by the indicator manually, then enter a short trade when the candle located at the same vertical space as the indicator high hits the trend line on the price action highs. At this time, the amplitude of the green indicator bars has started to reduce, showing that the trade bias is shifting to a bearish stance.
Stop Loss and Take Profit Settings
The stop loss is set at a few pips (about 20-30 pips) above the high price of the entry candle.
For the Take Profit settings, the following parameters are used:
- The amplitude of the red indicator histogram bars has gotten to its lowest possible point. Look at the chart and notice that where the Take Profit was set, the red histogram bars of the FX5 Divergence MT4 indicator had reached their maximum lows such that a reversal was in the offing.
- It is also possible to use a support to set the profit target. If a price reversal candlestick pattern forms, this can also be used as a signal to exit the trade. In any case, the TP should be at least 2X the stop loss.
Precautions when Trading with the FX5 Divergence MT4 Indicator
Not all the trend lines traced by the FX5 Divergence indicator point out accurate divergence signals. The only valid signals are those which obey the following rules:
- Trend lines must be traced from clearly defined highs and lows. Wherever the trend lines traced by the indicator do not trace from clearly defined peaks or clearly defined troughs, ignore the signals.
- Trend lines must only trace from one peak to another peak, or from one trough to another trough on both price action and FX5 Divergence MT4 indicator histogram bars.
- Candles used for entry must lie in the same vertical plane as the highest point on the indicator (green bars) or the lowest point on the indicator’s red bars.
FX5 Divergence MT4 Indicator Recommended Time Frames
Technically speaking, you can use this indicator for all time frames. However, the shorter the time frame, you will see more fluctuation and possibly more whipsaw which may cause small losses that can eat up your portfolio quickly. We recommend that you use higher time frames like the 4H for better consistency.
Forex Divergence Explained and Simplified Video Tutorial
Forex Divergence Explained and Simplified Video Tutorial
FX5 Divergence MT4 Indicator Download
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