Divergence Setups - Bearish Divergence Trading and Bullish Divergence Trading

Divergence Forex Definition - Divergence is one of the trade setups used by Forex traders. It involves looking at a forex chart & one more indicator. For our example we shall use the MACD indicator.

To spot this forex divergence trading setup find 2 chart points at which price makes a new swing high or a new swing low but the MACD indicator does not, indicating a divergence between forex price and momentum.

To look for divergence trading setup we look for 2 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 that you use to trade - for examples RSI indicator or MACD indicator.

Example of a Forex Divergence Trade Setup:

In the EURUSD forex chart below we spot two chart points, point A & point B (swing highs). These 2 chart points form an M-shape on the price chart.

Then using MACD technical indicator we check the highs made by the MACD technical indicator, these are highs that are directly below Chart points A and B.

We then draw one line on the chart & another line on the MACD technical indicator.

Drawing Divergence Lines - Forex Bearish Divergence Trading & Bullish Divergence Trading

The chart above shows example of one of the four types of divergences forex trading setups, the divergence trading set up above is known as hidden bearish divergence, one of the best type of divergence to trade because it gives trading signals that are in same direction as that of the current trend. Types of divergences forex trading setups are covered in the next learn forex lesson.

How to Identify Divergence Forex Setups

In order to spot Forex divergence signal we look for 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 on charts dealing with price Highs

W-Shapes on charts dealing with price lows

Example of M Shapes on Trading Charts

Examples of W Shapes on Charts

Now that you have learned the divergence trading terms that are used to explain divergence trading setups. Let us look at the two types of trading divergences and how to trade these divergence chart setups.

There two forex divergence types which are:

1. Classic Forex Divergence

2. Hidden FX Trading Divergence

These two divergence trading setups - classic divergence and hidden divergence are explained on the following learn forex guides in the next lessons