Divergence Setups - Bearish Divergence Trading and Bullish Divergence Trading

Divergence Forex Definition - Divergence is one of the forex trade setups used by Forex traders. It involves looking at a forex chart & one more indicator. For our example we shall use the MACD indicator.

To spot this forex divergence trading setup find two chart points at which forex trading price makes a new swing high or a new swing low but the MACD indicator does not, indicating a divergence between forex price and momentum.

To look for divergence trading setup we look for 2 chart points, two highs that form an M-shape on the Forex chart or 2 lows that form a W-Shape on the chart. Then look for the same M-shape or WShape on the Forex indicator that you use to trade - for examples RSI indicator or MACD indicator.

Example of a Forex Trading Divergence Trade Setup:

In the EUR USD forex chart below we identify two chart points, point A and point B (swing highs). These 2 chart points form an M-shape on the forex trading price chart.

Then using MACD technical technical indicator we check the highs made by the MACD technical indicator, these are the highs that are directly below Chart points A and B.

We then draw one line on the Forex chart & another line on the MACD indicator.

Drawing Divergence Lines - Forex Bearish Divergence Trading and Bullish Divergence Trading

The forex chart above shows an example of one of the 4 types of divergences forex trading setups, the divergence setup above is known as hidden bearish divergence, one of the best type of forex divergence to trade because it gives trading signals that are in the same direction as that of the current forex trend. Types of divergences forex trading setups are covered in the next learn forex trading lesson.

How to Identify Divergence Trading Setups

In order to spot Forex divergence trading signal we look for the following:

• HH = Higher High - two highs but the last one is higher
• LH = Lower High - two highs but the last one is lower
• HL = Higher Low - two lows but the last one is higher
• LL = Lower Low - two lows but the last one is lower

First let us look at the illustrations of these forex divergence trading terms:

M-shapes on forex charts dealing with price Highs

W Shapes on Forex Trading charts dealing with price lows

Example of M Shapes on Forex Trading Charts

Examples of W Shapes on Forex Charts

Now that you have learned the forex divergence trading terms that are used to explain forex divergence trading setups. Let us look at the two types of forex divergences and how to trade these forex divergence chart setups.

There two forex divergence types which are:

1. Classic Forex Trading Divergence

2. Hidden FX Trading Divergence

These two divergence trading setups - classic divergence and hidden divergence are explained on the following learn forex guides in the next lessons - divergence trading definition lessons.