Divergence in Forex Setups - Bullish and Bearish Divergence Trading

Divergence in FX is one of the trade set-ups used by traders. It involves looking at a chart and one more trading indicator. For our example we shall use 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 MACD indicator doesn't, indicating a Divergence in Forex between price and momentum.

To look for Divergence in Forex we look for two chart points, 2 highs that form an M shape on the trading chart or two lows that form a W-Shape on the trading chart. Then look for same M-shape or W-Shape on trading indicator you use to trade.

Example of a Divergence in Trade Setup:

In the EURUSD chart below we spot two chart points, point A & point B (swing highs). These two points form an M-shape on the market price chart.

Then using MACD indicator we check highs made by MACD, these are highs which are directly below Chart points A & B.

We then plot one line on the chart and another line on the MACD.

Forex Divergence in Trade Example on MACD Indicator - Divergences in Trade Charts

Drawing Divergence in Forex Trading Lines

The chart above portrays example of one of the four types of Divergence in Forex, the one above is referred to as hidden bearish Divergence in Forex, one of best type to trade. Types of Divergence in Forex are covered in the next lesson.

How to spot Divergence in Forex

In order to identify divergence setup we check for the following:

HH = Higher High - 2 highs but the last is higher
LH = Lower High - 2 highs but last one is lower
HL=Higher Low : two lows but the last is higher
LL = Lower Low- two lows but the last is lower

First let us look at the illustrations of these trading terms:

M-shapes dealing with Trading price Highs

Trading Divergence Setups in Charts - Bullish Divergence vs Bearish Divergence

Divergence in FX

W-Shapes dealing with price lows

Divergences in Trade Charts - Divergence Forex

Divergence in Forex

Example of M-Shapes

Examples of M shapes on a Chart - Bullish Divergence Trading & Bearish Divergence Trading

Divergence in FX

Examples of W Shapes

Divergences in Trade Charts - Bullish Divergence Trading & Bearish Divergence Setups

Divergence in Forex

Now that you have learned the Divergence in Forex terms that are used to explain trading set-up. Let us look at the 2 types of Divergence in Forex and how to trade these chart set-ups.

There two types are:

Classic Divergence in Forex
Hidden Divergence in Forex

These two set ups are explained on following lessons below

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