This Stochastic Divergence indicator is a custom technical indicator which provides mean reversal signals. It does so by adding a divergence component on a Stochastic Oscillator. This indicator plots lines connecting the peaks and dips on the Stochastic Oscillator as well as its corresponding peaks and dips on the price chart.
Stochastic divergence is a technical analysis concept that occurs when the price of an asset and the stochastic indicator move in opposite directions. It can signal a possible trend reversal or continuation, depending on the type of divergence. There are two types of stochastic divergence:
– Regular divergence: This happens when the price makes a higher high or a lower low, but the stochastic indicator makes a lower high or a higher low. This indicates a loss of momentum in the current trend and a potential reversal. For example, if the price is making higher highs, but the stochastic indicator is making lower highs, this is a bearish divergence that could indicate a downtrend is coming.
– Hidden divergence: This happens when the price makes a lower high or a higher low, but the stochastic indicator makes a higher high or a lower low. This indicates a continuation of the current trend and a good entry or re-entry point. For example, if the price is making lower highs, but the stochastic indicator is making higher highs, this is a bullish divergence that could indicate an uptrend is resuming.
Traders use the stochastic divergence to trade forex by looking for these signals on the price chart and the stochastic indicator. These signals can also combine them with other technical indicators, such as trend lines, support and resistance levels, and moving averages, to confirm entry and exit points.
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