However, there are signs that the downtrend will be coming to an end. While price has registered lower lows, the stochastic our indicator of choice is showing a higher low.
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Something smells fishy here. Is the reversal coming to an end? Is it time to buy this sucker? If you had answered yes to that last question, then you would have found yourself in the middle of the Caribbean, soaking up margaritas, as you would have been knee deep in your pip winnings!
It turns out that the divergence between the stochastic and price action was a good signal to buy.
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Price broke through the falling trend line and formed a new uptrend. If you had bought near the bottom, you could have made more than a thousand pips, as the pair continued to shoot even higher in the following months. Before we move on, did you notice the tweezer bottoms that formed on the second low? Keep an eye out for other clues that a reversal is in place. This will give you more confirmation that a trend is coming to an end, giving you even more reason to believe in the power of divergences!
Here we see that the pair has been in a downtrend.
Notice how price has formed a lower high but the stochastic is printing higher highs. According to our notes, this is hidden bearish divergence! Hmmm, what should we do? Time to get back in the trend?
If you decided to sit that one out, you might be as bald as Professor Xavier because you pulled out all your hair. Price bounced from the trend line and eventually dropped almost 2, pips! Imagine if you had spotted the divergence and seen that as a potential signal for a continuation of the trend?
The future belongs to those who believe in the beauty of their dreams.
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