Divergence in Forex Setups - Bullish and Bearish Divergence Trading
Divergence in Forex Trading is one of the trade setups used by Forex traders. It involves looking at a chart & one more indicator. For our examples we shall use the MACD indicator.
To spot this divergence trading setup find two chart points at which price makes a new swing high or a new swing low but the MACD indicator does not, indicating a Divergence in Forex between price & momentum.
To look for Divergence in Forex we look for two 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 you use to trade.
Example of a Forex Divergence in Forex Trade Setup:
In the EUR USD chart below we identify two chart points, point A and point B (swing highs). These 2 points form an M-shape on the price chart.
Then using MACD indicator we check highs made by MACD, these are the highs which are directly below Chart points A & B.
We then draw one line on the Forex chart & another line on the MACD indicator.
Drawing Divergence in Forex Trading Lines
The chart above shows an example of one of the 4 types of Divergence in Forex, the one above is known as hidden bearish Divergence in Forex, one of the best type to trade. Types of Divergence in Forex are covered in the next lesson.
How to spot Divergence in Forex
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- 2 highs but the last one is lower
- HL=Higher Low- 2 lows but the last one is higher
- LL= Lower Low- 2 lows but the last one is lower
First let us look at the illustrations of these trading terms:
M-shapes dealing with FX Trading price Highs
Divergence in Forex Trading
W Shapes dealing with price lows
Divergence in Forex Trading
Example of M Shapes
Divergence in Forex Trading
Examples of W Shapes
Divergence in Forex Trading
Now that you have learned the Divergence in Forex trading terms that are used to explain trading setup. Let us look at the 2 types of Divergence in Forex and how to trade these chart setups.
There two types are:
- Classic Divergence in Forex Trading
- Hidden Divergence in Forex Trading
These two setups are explained on the following guides below
