Divergence Trading - Forex Market Trading Strategies
Divergence 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 trading setup find two chart points at which price makes a new swing high or a new swing low but the MACD technical indicator does not, indicating a divergence between price and momentum.
To look for divergence trading setup we look for two chart points, two highs that form an M-shape on the Forex trading 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 chart indicator you use to trade.
Example of a Forex Divergence Trading Setup:
In the EURUSD currency chart below we identify two chart points, point A and point B (swing highs). These two points form an M-shape on the forex price chart.
Then using MACD technical indicator we check the highs made by the MACD, these are the highs that are directly below the Forex Chart points A and B.
We then draw one line on the Forex currency chart and another line on the MACD forex indicator.
Drawing Divergence Trading Lines - Divergence Trading Forex Market Strategies
The forex chart above shows an example of one of the four types of divergences trading setups, the one above is known as hidden bearish divergence trading setup.
How to spot divergence trading setups
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 divergence trading terms:
M-shapes for price Highs
Divergence Trading Forex Market Strategies
W-Shapes for price lows
Divergence Trading Forex Market Strategies
Example of M Shapes
Divergence Trading Forex Market Strategies
Examples of W Shapes
Divergence Trading Forex Market Strategies
Now that you have learned the divergence trading terms that are used to explain this trading setup. You can use these setups to look for trading opportunities when trading the forex market.
