Divergences are one of my favorite trading concepts because, when paired with other trading tools and concepts, they provide very reliable, high-quality trading signals. Although indicators, like price action, are somewhat lagging, when it comes to divergences, this lagging feature will actually help us locate better and more dependable trade entries, as we will see below. Divergences in Trading can be used by reversal traders and trend-following traders to time their exits. Divergences in Trading are a significant part of one of my setups, and they work well with other indications in my trading system. I don’t advise trading divergences independently, but they are good to start.

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February 3, 2022
What is Divergence in Trading?
trendingbrokers.com/divergence-in-trading
Divergences are one of my favorite trading concepts because, when paired with other
trading tools and concepts, they provide very reliable, high-quality trading signals.
Although indicators, like price action, are somewhat lagging, when it comes to
divergences, this lagging feature will actually help us locate better and more dependable
trade entries, as we will see below. Divergences in Trading can be used by reversal traders
and trend-following traders to time their exits.
Divergences in Trading are a significant part of one of my setups, and they work well with
other indications in my trading system. I don’t advise trading divergences independently,
but they are good to start.
Let’s start with the initial question: what is a divergence, and what does it tell you about
price?
On your chart, a divergence in trading occurs when the price reaches higher while the
indicator you are using produces a lower high. When your indicator and price changes are
not in sync, it suggests “something” is going on on your charts that needs your attention,
but it’s not clear from just looking at them.

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A divergence in trading occurs when your indicator does not “agree” with price
movement. Granted, this is a very basic overview, and we will go into more complicated
divergence concepts and how to trade them later, but it’s vital to start somewhere.
What is Divergence in Forex?
The term “Divergence in Forex” refers to the difference in readings from two or more
correlated data sources. Divergence in Forex is a mismatch between price peaks and
valleys and indicator peaks and valleys in trading.
Imagine being in the cockpit of an airplane, and the indicators suddenly begin to indicate
that you are rapidly losing altitude. At the same time, the weather is clear outside the
window, and you can see that the plane is in good working order. This is what we call
divergence in Forex.
Types of Divergence in Trading?
It’s important to remember that there are various types of divergence in trading. You
must be able to recognize and distinguish the many forms of divergences in Forex on
different periods to enter the market more correctly. Let’s take a look at each type
independently.
Regular Divergence
You can detect a trend reversal with regular divergence. This is an excellent opportunity
to sell short or purchase long. The price chart will prepare for a downward trend if the
divergence in trading is negative. Forex traders should get ready to sell. It’s worth getting
ready to buy when there’s a bullish divergence since the chart will go up. Divergence in
Forex can take several forms. The most important thing is to use the oscillator to establish
its type correctly.
Bearish Divergence
A trader must look at the price highs and the associated indicator to spot bearish
divergence in trading. A traditional bearish divergence in trading will occur when specific
characteristics are met: a high should form on the price chart and the indicator should
show a lower high.
Bullish Divergence
The lows of the chart and the indicator should be considered when determining the classic
bullish divergence. When there is a normal bullish divergence in the market, the
candlesticks will show a lower price value, but the indicator will show a higher low. In this
instance, we should anticipate higher movement, which means the trader should prepare
to buy.
Extended Divergence

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Extended Forex divergence resembles traditional divergence in appearance. On the other
hand, it creates a pattern that resembles a “double bottom” or “double top.”
Everything is evident with graphical numbers, but how can you tell which way the market
is going if the indicators show a second low or high that is substantially different from the
terminal’s lowest and maximum prices? If this characteristic is observed, the price will
remain in the same direction.
Bearish Divergence
If the chart shows an extended bearish divergence, it can only suggest one thing: prices
will continue to fall, and you should search for a selling opportunity. The trader should
pay attention to the peaks (highs) on both the chart and the indicator to determine the
extended bearish divergence.
This kind of divergence is usually found near the tops during a major move. Although the
market forms a double top, the second price peak may be somewhat higher or lower than
the first. The indicator will display a lower second high even if the top levels are the same.
The indicator will not draw the price chart’s double top.
Bullish Divergence
If you see an extended bullish divergence on the chart, you should seek a buying
opportunity as prices rise. To spot an extended bullish divergence in the terminal, look for
the lower half or lows of both the price and the basement indication. Quotes usually form
a double bottom during an extended bullish divergence.
Hidden Divergence
The continuation of the trend is indicated by hidden divergence. It is more difficult to spot
in a trading terminal. Hidden divergence clearly indicates whether to open a buy or sell
position. If there is a concealed bearish divergence in the market, the price chart will
likely continue to trend downward. The price will climb if there is a concealed positive
divergence on the chart.
Bearish Divergence
To spot the hidden bearish divergence in trading, you must first recognize the candlestick
(How to read candlestick charts) peaks or price highs, as well as the indication.
Hidden divergence can be detected using the MACD indicator. Only when the price falls
do this scenario materialize. If the indicator currently displays a divergence, a downward
trend is likely in the future.
Bullish Divergence
You must pay attention to the chart’s lows as well as the indicator to detect concealed
bullish divergence. When the market is moving upward, drawing high lows and the
indicator is reading lower, this type of divergence happens.

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How Divergence in Trading Work?
Day traders interpret a change in the indicator’s direction as a sign that price is about to
follow. In this case, the oscillator is used as a leading price indicator.
The idea behind using divergence in trading to analyse market prices is that the signal
indicates a decrease in price velocity. This is because the price’s momentum will
frequently alter before the price itself.
Consider throwing a frisbee into a high wind: the frisbee will initially fly against the wind,
then slow down, then finally change direction and fly with the wind.
Best Divergence in Trading Indicator
There is no single most preferred indicator for divergence in trading. Every technical
indicator has its own set of advantages and disadvantages. The three most popular
indicators will be covered: RSI, MACD, and Stochastic.
Strategies of Divergence in Trading
RSI for Divergence in Trading
The RSI indicator, also known as an underlay indicator, is a momentum indicator drawn
as an oscillator between 0 and 100 beneath the candlestick chart. The RSI is determined
by taking the average of price changes over the past 14 periods. J. Welles Wilder Jr
created “New Concepts in Technical Trading Systems”.
The indicator generates a smooth line that tends to follow the price trend, making it ideal
for divergence in trading. In addition, the RSI indicator delivers few overbought and
oversold indications when set to the default 14-period value. That means that while there
are fewer signs when utilising divergence as a trading signal, they are more reliable when
they do occur.
MACD for Divergence in Trading
The MACD is a momentum indicator that performs well in trend-following situations. A
signal line and a histogram depicting the difference between two moving averages are
plotted by the trend indicator. The moving averages will converge and diverge as the trend
proceeds, finally reversing.
The histogram’s visual appeal lends itself well to trading divergence, but it is less
interpretable once a new ‘swing point’ has been established. Because the MACD has no
pre-defined overbought and oversold zones, determine whether trend trade signals are
reliable. This can be overcome by properly utilizing prior MACD peaks as locations of
support and resistance.
Stochastic for Divergence in Trading

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The stochastic Divergence is a technical momentum indicator that compares the most
recent closing price to a range of previous prices over the preceding 14 periods. Because
stochastic is a more sensitive indicator, it will provide more divergence in trading
indications and thus more trading possibilities, but it will also provide more false signals.
Is Divergence in Trading Profitable?
Yes, it is profitable, but it is not always the case! It’s important to note that indicators are
used to filter price action. Depending on the trade arrangement, the filter can assist us to
focus on what’s crucial or missing what’s important.
The main benefit of employing divergence as a trading signal for determining when to
enter a trade is that it provides the signal before the price trend has altered. The trader
gets a better entry price for their transaction because of the early signal.
The drawback of employing divergence in trading as part of a good method is that it can
produce “false signals.” This occurs when the indicator switches direction, but the price
trend does not reverse as predicted by the indicator. This frequently occurs when the
indicator becomes extremely overbought or oversold. The trend’s momentum will wane,
but the trend will continue.
How to Confirm Divergence in Trading?
There are certain tried-and-true methods for reducing false signals and increasing the
number of profitable trades. These are some points by which we come to know about
divergence in trading:
Only consider divergence signs in the long-term direction of the trend. Alternatively,
in a sideways market that is rangebound. For example, In a negative market, only
take bearish RSI indications and only take RSI signals in a bull market.
Always wait for the candle that confirms the divergence in Trading to close before
entering a trade. Indicators will offer a signal based on the candle’s present state. A
trading signal from divergence might vanish as quickly as it appeared if the candle
finishes differently.
Other indications, such as support and resistance levels, round numbers, pivot
points, or a price action trading pattern, might be used to confirm the signal.
How to Trade with Divergence?
Divergence in trading can be a useful addition to your trade strategy, especially if you are
already utilizing indicators like the RSI or MACD to detect overbought and oversold
levels. However, it shouldn’t rely solely on trading divergence, and it takes practice to do it
correctly.

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A divergence does not necessarily result in a violent reversal; in fact, the price frequently
enters a sideways consolidation after a divergence in trading. Remember that a
divergence indicates a lack of momentum and does not imply a complete trend shift.
Other criteria and confirmation methods should be added to your arsenal to avoid trade
entries that don’t go anywhere. A divergence by itself is insufficient, and many traders
have had poor results when trading just with divergences. You’ll need to incorporate more
confluence factors to make your method stronger, just like any other trading technique.
We can see how price made two divergences but never sold off in the chart below. As a
result, the divergences only served to highlight short-term consolidation.
How to Use Divergence in Trading in the Best Possible Way?
Traders use divergence in trading to figure out if a trend is weakening, leading to a trend
reversal or continuation. Here are nine excellent principles for trading divergences by
which a trader come o know how to use divergences in trading before you go out and start
hunting for probable divergences:
Clean your Glasses
To have a divergence in trading, the price must have formed one of the following patterns:
Higher high than the previous high
Lower low than the previous low
Double Top
Double Bottom