How Do I Analyze Forex Divergence Trading & Trade Divergence Setups in Trading?
How Do You Trade Forex Divergence Trading & Trade Divergence Setups in Trading?
Divergence Forex Definition - Divergence forex trading is one of the trading setups used by traders. Divergence forex trading involves looking at a chart and one more indicator. For our divergence examples we shall use MACD indicator.
To spot this trade divergence find two chart points at which price makes a new swing high or a new swing low but the MACD indicator doesn't, indicating a trade divergence between price & momentum.
To search for divergence trading signal we look for two chart points, two highs which form an M shape on the Forex trading chart or 2 lows that form a W Shape on trading chart. Then look for same M shape or W Shape on Forex trading indicator that you use to trade - for examples RSI indicator, MACD indicator or Stochastic Oscillator indicator.
Example of a Divergence Trade Setup:
In the chart below we spot two chart points, point A and point B (swing highs). These 2 chart points form an M shape on price chart.
Then using MACD indicator we check highs made by MACD indicator, these are 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.
Drawing Divergence Trading Lines
The chart above displays example of one of the four types of trade divergence setup, one above is referred to as hidden bearish divergence. Types of trade divergence set ups are covered in the next learn forex trading lesson.
How Do You spot divergence trading setup?
In order to identify divergence signal we look for following:
- HH - Higher High - two highs but last one is higher
- LH - Lower High - two highs but last one is lower
- HL - Higher Low - two lows but last one is higher
- LL - Lower Low - two lows but last one is lower
First let us look at the illustrations of these divergence forex trading terms:
M shapes on charts dealing with price Highs
W Shapes on charts dealing with price lows
Example of M-shapes on Charts
Examples of W Shapes on Charts
Now that you have learned the divergence forex trading terms which are used to explain divergence forex trading set-up. Let us look at the two types of forex trading divergences and how to trade these divergence chart setups.
The two divergence types which are:
- Classic Trading Divergence
- Hidden Forex Trading Divergence
These two trade divergence set ups - classic divergence trading & hidden divergence trading are described on the learn forex tutorials in the lessons tutorials on this learn forex trading website located at the navigation menu under the topics learn forex trading lessons.
How Do I Analyze Forex Divergence Trading & Trade Divergence Setups in Trading?
