Trading With Divergence In Forex

Divergence means deviation. Trading with divergence in forex is a strategy comprised of momentum indicators and Japanese candlesticks charts. Momentum indicators like RSI, CCI, Stochastic and MACD are used to identify divergences. For trading with divergence in forex, the understanding of candlesticks and momentum indicators is very important.

Normally the directional movement of the indicator is in accordance with price direction. The scenario in which price and indicator’s direction differ it creates divergence. Opposite directional price and indicator’s movements are the basis of divergence.

Divergence can give us entry and exit signal at very top and bottom. Divergence is the first indication of the ending and start of any trend. It confirms the bottom in the bottom and top in the top of any trend.

Contents

Bullish Divergence

     Identification of Bullish Divergence

     Trading Bullish Divergence

Bearish Divergence

     Identification of Bearish Divergence

     Trading Bullish Divergence

Do’s and Don’ts of Divergence

Divergence in forex is identified as regular or hidden. Regular divergence is much more reliable. On the other side, hidden divergence is difficult to identify and gives us a shorter reversal.

Divergence can also be regarded as bullish or bearish divergence as elaborated in the below content and pictures.

Bullish Divergence

While trading with divergence in forex, bullish divergence indicates uptrend and signals for buy/long positions.

Bullish divergence in forex is identified by the lower-lows of price and higher-lows of the indicator. Any momentum indicator can be use along with candlestick price.

Bullish divergence by Let’s Forex.

Identification of Bullish Divergence

A bullish divergence occurs in a downtrend. An identification of bullish divergence can be done on the lower side of price and momentum indicator.

Classification of Bullish Divergence

There are two classifications of a bullish divergence. Each of them is explained below in the content and pictures.

  1. Indicator-based bullish divergence (Regular)
  2. Price base bullish divergence (Hidden).

Regular Bullish divergence

The regular bullish divergence appears with the below conditions.

  • The momentum indicator is making higher lows in a downtrend.
  • Price is making lower-lows.
Regular Bullish Divergence

Regular Bullish Divergence by Let’s Forex

The higher-lows of momentum indicator give signals for the price to turn bullish.

Hidden Bullish divergence

The hidden bullish divergence appears with the below conditions.

  • Price is making higher-low.
  • The momentum indicator is making a lower low in a downtrend.
Hidden Bullish Divergence

Hidden Bullish Divergence by Let’s Forex

In the “price bullish divergence” scenario, momentum indicator signals exertion (oversold). The higher lows of price indicate continuous dominance of bulls.

Trading Bullish Divergence

The use of candlestick for trading bullish divergence is one of the best trading strategies.  It identifies the top and bottom more accurately.

Candlestick patterns confirming bullish divergence.

  1. Single Candlestick Patterns: Dragonfly Doji, Hammer, Inverted Hammer.
  2. Double Candlestick Patterns: Bullish Engulfing, Piercing, Tweezer Bottoms.
  3. Other Candlestick Patterns: Double Bottom, Triple Bottom, Inverse Head and Shoulder, Falling Wedge, Bullish Rectangle, Bullish Pennant.

After the confirmation pattern completes, it would be a buying opportunity.

Bearish Divergence

While trading with divergence in forex, bearish divergence indicates downtrend and signals for sell/short positions.

Bearish divergence in forex is identified by the higher-high of price and higher-lows of the indicator. Any momentum indicator can be use along with candlestick price.

Bearish Divergence by Let’s Forex

Identification of Bearish Divergence

A bearish divergence occurs in a downtrend. An identification of bearish divergence can be done on the upper side of price and momentum indicator.

Classification of Bearish Divergence

There are two classifications of a bearish divergence. Each of them is explained below in the content and pictures. 

  1. Indicator-based bearish divergence (Regular).
  2. Price base bearish divergence (Hidden).

Regular Bearish Divergence

The regular bearish divergence appears with the below conditions

  • Price is making higher-high.
  • The momentum indicator is making higher lows in the uptrend.
Regular Bearish Divergence

Regular Bearish Divergence by Let’s Forex

The higher-lows of momentum indicator give signals for the price to turn bearish.

Hidden Bearish divergence

The regular bearish divergence appears with the below conditions

  • Price is making higher-low
  • The momentum indicator is making higher-high in the uptrend
Hidden Bearish Divergence

Hidden Bearish Divergence by Lets’Forex

In the “price bearish divergence” scenario, momentum indicator signals overbought. The higher-lows of price indicates gaining dominance of bears.

Trading Bearish Divergence

The use of candlesticks for Trading bearish divergence in forex is one of the best trading strategies. It identifies tops and bottoms more accurately. 

Candlestick patterns confirming bearish divergence.

  1. Single Candlestick Patterns: Gravestone Doji, Hanging man, Shooting Star
  2. Double Candlestick Patterns: Bearish Engulfing, Dark Cloud Cover, Tweezer Top
  3. Other Candlestick Patterns: Double Top, Triple top, Head and Shoulder, Rising Wedge, Bearish Rectangle, Bearish Pennant.

After completing of confirmation pattern the divergence will be valid and it would be a selling opportunity.

Do’s and Don’ts of Divergence

The following are do’s and Don’ts need to be considered while trading with divergence in forex.

  • Must analyze candlesticks.
  • Must be fully aware of economic and political events.
  • Identify bullish divergence at double bottom of the downtrend
  • Identify bearish divergence at the double top of the uptrend.
  • Don’t get confused with consolidations reversals in the mid of any trend.
  • A divergence is a tool indicating probability just like others, no indicator is foolproof.
  • Must trade according to money management rules and psychological discipline.

Key Terms:

Forex, Divergence, Bullish divergence, Bearish divergence, Candlesticks.

More related resources:

Other helpful resources:      

Hope you have enjoyed reading, please feel free to comment below and share the article, Thanks.

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *

error: Content is protected !!