Divergence in Forex Setups - Bullish and Bearish Divergence Trading
Divergence in FX is one of the trade setups used by traders. It involves looking at a chart and one more 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 chart or two lows that form a W-Shape on the chart. Then look for same M-shape or W-Shape on indicator you use to trade.
Example of a Divergence in Trade Setup:
In the EURUSD chart below we spot 2 chart points, point A & point B (swing highs). These 2 points form an M-shape on the 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.
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 signal we check 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 Trading price Highs
Divergence in FX
W-Shapes dealing with price lows
Divergence in Forex
Example of M Shapes
Divergence in FX
Examples of W Shapes
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 setups.
There two types are:
- Classic Divergence in Forex
- Hidden Divergence in Forex
These two set ups are explained on following courses below
