Divergence Index in Forex Trading - Classic Divergence and Hidden Divergence
Divergence Index in Forex 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 two lows that form a W-Shape on the Forex chart. Then look for the same M-shape or W-Shape on the Forex indicator you use to trade.
Example of a Forex Divergence Index in Forex Trade Setup:
In the EURUSD chart below we identify two chart points, point A and point B (swing highs). These two points form an M-shape on the price chart.
Then using MACD indicator we check the highs made by the MACD, these are the highs that are directly below Chart points A and B.
We then draw one line on the Forex chart and another line on the MACD indicator.
Drawing Divergence Index in Forex Trading Lines
The chart above shows an example of one of the four 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 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 price Highs
Divergence Index in Forex
W-Shapes dealing with price lows
Divergence Index in Forex
Example of M Shapes
Divergence Index in Forex
Examples of W Shapes
Divergence Index in Forex
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
- Hidden Divergence Index in Forex
These two setups are explained on the following tutorials below
