Tips To Avoid Entry Too Fast Trading At Divergences (2)
There are other tips to avoid entry too fast when trading especially when you use divergence trading strategy.
Waiting for the indicator to move out of the overbought or oversold area.
Another tip is to wait for high and low momentum to reach overbought or oversold conditions and wait for the indicator to get out of this condition.
The reason for doing this is similar to waiting for a crossover – you really do not know when the momentum will start to change. Suppose that when looking at the chart, you see that the price has formed a new low price while the stochastic indicator has not.
You might think that this is the time to buy because the indicator shows oversold conditions and divergences have formed. However, selling pressure may remain strong and prices continue to fall and create new lows.
In fact, the descending trend may just start because the currency pair is now forming the new lows. You may ignore this move.
If you have been patiently waiting for further confirmation that divergence has formed, then you can avoid losses and just realize that new trends are developing.
Draw a trend line on the momentum indicator itself.
Maybe this will be a new experience for you. Because you will usually draw a trend line only on price action.
These tips can be very useful especially when looking for a reversal or pause of an ongoing trend. If you see a price graph stuck or at least make the trend line important, try drawing a similar trend line on your indicator. Later you may notice that the momentum indicator you are using will also find the trend line important.
If you see both price action and momentum indicator, breaking through their respective trend lines, it can signal a change in the direction of strength from buyer to seller (or vice versa) and the trend may change.