Divergence Index in Trading Forex - Classic Divergence and Hidden Divergence
Divergence Index in Forex Trading is one of the trade setups used by Forex traders. It involves looking at a chart and one more indicator. For our example we shall use the MACD indicator.
To spot this divergence index 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 Index in Forex between price and momentum.
To look for Divergence Index 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 Index in Forex Trade Setup:
In the EUR USD chart below we spot two chart points, point A & 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 Index in Forex Trading Lines
The chart above shows an example of one of the 4 types of Divergence Index in Forex, the one above is known as hidden bearish Divergence Index in Forex, one of the best type to trade. Types of Divergence Index in Forex are covered in the next lesson.
How to spot Divergence Index 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- 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 trading terms:
M-shapes dealing with Forex Trading price Highs
Divergence Index in Forex Trading
W Shapes dealing with price lows
Divergence Index in Forex Trading
Example of M Shapes
Divergence Index in Forex Trading
Examples of W Shapes
Divergence Index in Forex Trading
Now that you have learned the Divergence Index in Forex trading terms that are used to explain trading setup. Let us look at the two types of Divergence Index in Forex and how to trade these chart setups.
There two types are:
- Classic Divergence Index in Forex Trading
- Hidden Divergence Index in Forex Trading
These two set ups are explained on the following guides below
