Trade Forex Trading

How Do You Trade Classic Bullish Divergence and Bearish Divergence - Classic Bullish vs Classic Bearish Divergence

In FX trading, classic divergence is used as a possible sign for a trend reversal and is used by the FX traders when looking for an area where price could reverse and begin and start & begin going in the opposite direction. For this reason this setup is used as a low risk entry method/technique and also as an accurate way of exit out of a currency trade.

This strategy is a low-risk method for making sell trades near the top or buy trades near the bottom, ensuring that the risks involved in these trades are minimal compared to the possible reward. However, this technique can generate numerous whipsaw signals, and many traders advise against it.

Divergence in Trading is also used to predict the ideal optimum point/level at which to exit a trade position. If you already have an opened trade position that's already profitable, a good way to spot a profit booking level would be the point where you spot this setup.

There are 2 types, based on the direction of the price trend:

  1. Classic Bullish divergence
  2. Classic Bearish divergence

Classic Bullish Divergence

Classic bullish divergence happens when prices hit lower lows but the oscillator hits higher lows. The example below illustrates this.

Classic Bullish Divergence Setup - Classic Bearish vs Classic Bullish Divergence

Classic Bullish Trade Divergence Trading Setup

This example uses MACD as a divergence technical indicator.

From the above illustration price made a lower low(LL) but technical indicator made a higher low(HL), this portrays there's a divergence between the price and the technical technical indicator. The signal warns of a possible trend direction reversal.

Classic bullish divergence signal warns of a possible change in the trend from downward to upward. This is because even though the price went lower the volume of the sellers who pushed price lower was less as illustrated & shown by MACD indicator. This reflects underlying weakness of the downward trend.

Classic bearish Divergence

A classic bearish divergence setup happens with a higher price high but a lower oscillator high. The screenshot below shows this pattern.

Classic Bearish Divergence Trade Setup - Classic Bullish vs Classic Bearish Divergence

Classic Bearish Divergence

MACD indicator is also used in this example.

As illustrated previously, if the price reaches a higher high (HH) while the indicator registers a lower high (LH), this indicates a divergence between the price and the indicator. Such a signal suggests a potential reversal in the trend direction.

A classic bearish divergence signals a shift from up to down. Prices hit new highs, but buyer volume drops, as MACD shows. This points to weakness in the uptrend.

In the example above, divergence would have given clear entry and exit signals at key points. But like other indicators, divergence can produce false signals. Always check it with tools like RSI, moving averages, or Stochastic oscillator.

The stochastic oscillator is an excellent indicator to incorporate with standard divergence configurations: you should wait for the lines of the stochastic oscillator indicator to travel towards the direction suggested by the divergence to confirm the trade setup.

The MA technical indicator is another solid tool to use. Try the MA Crossover System if you're looking for a good strategy.

Example of MA(Moving Average) Cross over Technique/Method Strategy

Strategies of MA(Moving Average) Cross-over Strategy - MAs Crossover Forex Method

Once the divergence trading signal is generated, a trader will then wait for the Moving Average cross-over trading strategy to give a trading signal in the same direction, if there's a classic bullish setup, a trader will wait for the moving average system to give an upwards cross-over signal, while for a bearish classic divergence signal the trader should wait for the Moving Average cross over system to give a downward bearish crossover signal.

By using regular divergence signals with other indicators like this, a trader can avoid quick changes in trading regular divergence signals, because the trader will wait until the market has changed and is moving in that direction, so the trader will not get tricked into finding the market's highest and lowest points.

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