Divergence Trading Setups - Bearish Divergence Trading and Bullish Divergence Trading
Divergence Forex Definition - Divergence is one of the trade setups used by traders. It involves looking at a forex chart and one more forex indicator. For our example we shall use the MACD indicator.
To spot thisforex divergence trading setup find two chart points at which forex price makes a new swing high or a new swing low but the MACD indicator does not, indicating a divergence between price and momentum.
To look for divergence forex trading setup we look for two chart points, two highs that form an M-shape on the Forex 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 indicator that you use to trade - for example RSI indicator, MACD indicator or Stochastic Oscillator Indicator.
Example of a Forex Divergence Trade Setup:
In the EURUSD forex chart below we identify two chart points, point A and point B (swing highs). These two chart points form an M-shape on the price chart.
Then using MACD indicator we check the highs made by the MACD indicator, these are the highs that are directly below Chart points A and B.
We then draw one line on the Forex chart and another line on the MACD indicator.
Drawing Divergence Trading Lines - Bearish Divergence Trading and Bullish Divergence Trading
The forex trading chart above shows an example of one of the four types of divergences forex trading setup, the one above is known as hidden bearish divergence, one of the best type of forex divergence to trade. Types of divergences forex trading setups are covered in the next learn forex trading lesson.
How to spot divergence forex trading setup
In order to spot Forex divergence trading 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 forex divergence trading terms:
M-shapes on forex charts dealing with price Highs
W-Shapes on forex charts dealing with price lows
Example of M Shapes on Forex Trading Charts
Examples of W Shapes on Forex Charts
Now that you have learned the forex divergence trading terms that are used to explain divergence trading setup. Let us look at the two types of forex trading divergences and how to trade these forex divergence chart setups.
There two forex divergence types which are:
- Classic Divergence
- Hidden Divergence
These two setups - classic forex divergence and hidden forex divergence are explained on the following learn forex tutorials in the next forex lessons - divergence forex definition learn forex trading lessons