There is a real risk of entering a trade too early. And by going inside too early you can end up saving enough pips for you to go broke in the end.
But do not worry. There are several tricks that you can use in order to enter a trade just right while trading divergence.
- Wait for an indicator crossover;
- Wait for indicator to move out of the overbought or oversold territories;
- Draw trend lines on the momentum indicators themselves.
Each of them is going to be of a good use to us, so let’s roll.
One of the surest ways to know that you are not getting into a trade too early is to wait. I know, it seems quite obvious, but in this case we are to wait for a very particular occasion – indicators crossover.
When you are using several momentum indicator, which is advised, and one of them is already displaying a sign of divergence with the graph all you need to do is to wait for another one to confirm what you already thinking.
Look at the picture. After the crossover and the divergence, the price went down. But those, not waiting for a crossover might have easily sold out too soon.
Wait for overbought/oversold position to pass
Another way to be sure that the trade you are getting in is just right and warmed up for you to enjoy those sweet-sweet pips is to wait until your indicator moves out of overbought and oversold market position. The reasoning behind this is the same as with the previous one – you simply don’t know when momentum is going to be right for you.
The point is that even if you think that overbought market is going to go up, that may not be the case as the pressure from the condition of the market may be too much to bare. In fact, the pair is likely to go on with the rise, so it is better to wait and see what the market has in stock for you.
Draw trend lines
And the last way to know exactly when to enter a trade is to draw literal trend lines on the momentum indicators. It Is one of the best ways to spot trend reversal. If you draw a trend line on the graph and on the indicators, you need to look for the exact moment of a divergence. As soon as the line of the trend crosses a divergence of the indicator and the graph – boom, there is your perfect timing.
Here is the example of how this all works.