Divergence Setups - Forex Divergence Trading Entry and Exit
Divergence Forex Definition - Divergence forex trading is one of the forex trading setups used by Forex traders. Divergence forex trading involves looking at a forex chart & one more forex indicator. For our divergence example we shall use the MACD forex indicator.
To spot this forex trading divergence 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 forex trading divergence between price & momentum.
To look for divergence forex trading signal we look for 2 chart points, 2 highs that form an M shape on the Forex trading chart or two lows that form a WShape on trading chart. Then look for same M shape or W Shape on Forex indicator that you use to trade - for examples RSI indicator, MACD indicator or Stochastic Oscillator indicator.
Example of a Forex Divergence Trade Setup:
In the forex chart below we identify 2 chart points, point A and point B (swing highs). These 2 chart points form an M shape on forex price chart.
Then using MACD indicator we check highs made by MACD technical indicator, these are the highs that are directly below Chart points A & B.
We then draw one line on the Forex trading chart & another line on the MACD indicator.
Drawing Divergence Lines - Forex Divergence Entry and Exit
The forex chart above shows example of one of the 4 types of forex trading divergence setup, one above is known as hidden bearish forex divergence. Types of forex trading divergence set ups are covered in the next learn forex trading lesson.
How to spot divergence forex trading setup
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 - 2 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 forex trading terms:
M shapes on Forex Trading 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've learned the divergence forex trading terms which are used to explain divergence set-up. Let us look at the two types of forex trading divergences and how to trade these forex divergence chart setups.
The two forex divergence types which are:
- Classic Forex Trading Divergence
- Hidden Forex Divergence
These two forex trading divergence set ups - classic divergence trading and hidden divergence trading are described on the following learn forex guides in the forex lessons tutorials on this website located at the navigation menu under the topics learn forex trading lessons.
