Divergence Setups - Bearish Divergence Trade and Bullish Divergence Trading

Divergence Definition - Divergence is one of the trade transaction patterns used by the traders. It involves looking at a chart and one more trading indicator. For our example we shall use the MACD.

To spot this divergence setup find 2 chart points at which price makes and forms a new swing high or new swing low but the MACD doesn't, indicating a divergence between price and momentum.

To search for divergence setup we look for 2 points, 2 highs which form an M-shape on the chart or 2 lows that form a W Shape on the trading chart. Then look for same M-shape or W-Shape on indicator which you use to trade - for examples RSI or MACD.

Explanation of a Divergence Trading Setup:

In the EUR/USD chart below we spot two chart points, point A and point B (swing highs). These 2 points form an M-Shape on the price chart.

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

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

Drawing Divergence Lines - Forex Bearish Divergence Trade and Bullish Divergence Trading

The chart above highlights exemplification of one of the 4 types of divergences setups, the divergence set up above is known as hidden bearish divergence, one of the best type of divergence to trade because it gives signals that are in the same direction as that of the current trend. Types of divergences setups are discussed in the next learn lesson.

How to Identify Divergence Setups

In order to identify 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 explanations of these divergence trading terms:

M-shapes on charts dealing with price Highs

W Shapes on charts dealing with price lows

Explanation of M-shapes on fx Charts

Examples of W Shapes on fx Charts

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

There two divergence types which are:

1. Classic Divergence

2. Hidden Divergence Trading Setup

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

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