Learn more about trading divergence in forex and how you can use it to trade the markets.Learn more about divergence trading
What is divergence?
Divergence is a popular term in technical analysis that describes when the price of an asset is moving in the opposite direction of a technical indicator.
For instance, if the currency price is moving up, but a technical indicator (e.g. oscillator) is moving in the opposite direction. When it comes to trading divergences, there are two types and each contain either a bullish bias or a bearish bias.
The divergence types are:
- Regular divergence
- Hidden divergence
What is Regular Divergence?
Regular divergence is a signal of a possible trend reversal. Regular divergence can be spotted when the pair makes higher highs or lower lows while the indicator doesn't follow this pattern. This indicates an early warning for traders that the trend could be coming to an end soon.
Regular Bullish Divergence
Regular Bullish Divergence indicates underlying strength. Regular Bullish Divergence occurs as a warning of a potential change of trend direction from a downtrend to an uptrend.
Regular Bearish Divergence
Regular Bearish Divergence indicates underlying weakness. Traders believe that it is a warning of a potential change of trend direction from an uptrend to a downtrend.
What is Hidden Divergence?
Hidden divergence is a signal of possible trend continuation. It gets its name from the fact that it is not always easy to spot. Hidden divergence occurs when an indicator makes a higher high or low whilst the price action does not. Hidden divergence occurs within an existing trend and indicates that there is still strength in the prevailing trend and that the trend will resume.
Hidden Bearish Divergence
Hidden Bearish Divergence indicates underlying weakness and can be found when the pair is in a downtrend.Hidden Bearish Divergence can be found when price makes a lower high, but the indicator is making a higher high. When you spot this on your chart, chances are that the currency pair will continue the downtrend.
Hidden Bullish Divergence
Hidden Bullish Divergence indicates underlying strength and hidden bullish divergence occurs when the pair is in an uptrend. Once price makes a higher low (HL), look and see if your indicator follows the price. If it does not and in fact makes a lower low (LL), then that's what you call hidden divergence. Or in other words, this divergence pattern screams 'buy the dips'.
What indicator can you use to trade divergence?
There are different indicators traders can use to identify divergence. Some of the most popular ones include:
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