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 forex indicator. For our example we shall use the MACD indicator.
To spot this forex divergence trading setup find 2 chart points at which forex 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 forex trading setup we look for 2 chart points, 2 highs that form an M-shape on the Forex chart or two lows that form a W-Shape on the chart. Then look for same M-shape or W-Shape on Forex indicator that you use to trade - for examples RSI indicator or MACD indicator.
Example of a Forex Divergence Trade Setup:
In the EURUSD forex chart below we spot two chart points, point A & point B (swing highs). These 2 chart points form an M-shape on the forex price chart.
Then using MACD technical indicator we check the highs made by the MACD technical indicator, these are highs that are directly below Chart points A and B.
We then draw one line on the Forex chart & another line on the MACD technical indicator.
Drawing Divergence Lines - Forex Bearish Divergence Trading and Bullish Divergence Trading
The forex chart above shows example of one of the four types of divergences forex trading setups, the divergence trading set up 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 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 Forex Trading Setups
In order to spot Forex divergence signal we look for 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 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 trading divergences and how to trade these forex divergence chart setups.
There two forex divergence types which are:
- Classic Forex Trading Divergence
- 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 forex trading definition lessons.
