Posted by forex at 5:27 AM
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1. Understand the meaning of 'divergence.' Divergence is used to explain price movements which fall outside of the normal range for trading. Traders refer to this range as the 'trend.'
2. Calculate the difference between the 26-day and 12-day moving average. A moving average can be calculated by using a complex mathematical formula. In lieu of this, most any forex tool package will provide you with an option to chart the moving average for almost any time period. The 12-day moving average, because it is averaged over a shorter period of time, will be more volatile (have more price fluctuations) than the 26-day moving average. This is illustrated in the relative smoothness of the lines.
3. Chart a nine-day moving average. This average will act as your trigger line for buy (entry) and sell (exit) decisions. As the nine-day moving average 'diverges' from the range set by the 12- and 26-day moving average, you will find opportunities for profit. The more the nine-day moving average diverges from the 12- and 26-day average, the more momentum the price movement is said to have.
4. Monitor and interpret the nine day moving average. If prices are rising at a rapid pace, the nine day moving average will show a sharp movement up. However, if prices are falling or slowing, the average will show a small yet steady movement down (contraction).