Trading Divergences in Forex

Divergence occurs when price moves in one direction while an indicator (such as RSI or MACD) moves in the opposite direction. Bullish divergence suggests potential upward reversal; bearish divergence suggests potential downward reversal.

Key types of divergence

1. Regular bullish divergence: Price makes lower lows while the indicator makes higher lows. Suggests weakening selling pressure.
2. Regular bearish divergence: Price makes higher highs while the indicator makes lower highs. Suggests weakening buying pressure.
3. Hidden divergence: Confirms the prevailing trend rather than signaling reversal.

Step 1: Identify two swing highs or two swing lows on price. Step 2: Compare with the same points on your indicator (RSI or MACD). Step 3: If price makes a lower low but RSI makes a higher low, that is bullish divergence. Step 4: If price makes a higher high but RSI makes a lower high, that is bearish divergence. Step 5: Wait for confirmation—a reversal candle or break of structure—before entering.

Regular divergence signals a potential reversal. Hidden divergence confirms the trend: in an uptrend, price makes higher lows while the indicator makes lower lows; in a downtrend, price makes lower highs while the indicator makes higher highs. Use regular divergence for reversals; use hidden divergence to add to trend-following positions.