Forex divergence refers to a situation where the price of a currency pair and an indicator (typically an oscillator like the Relative Strength Index or MACD) move in opposite directions. There are two primary types of divergence in forex trading: regular divergence and hidden divergence.
 |
| How to Identify Types of Forex Divergence |
Here’s how to identify each type:
1. Regular Divergence
Regular divergence suggests a potential reversal in the market. It occurs when the price moves in the opposite direction of the oscillator. Regular divergence can be either bullish or bearish.
-
Bullish Regular Divergence:
- Price forms lower lows, but the oscillator forms higher lows.
- This indicates that despite the price continuing to drop, momentum is shifting upwards, suggesting a possible reversal to the upside.
-
Bearish Regular Divergence:
- Price forms higher highs, but the oscillator forms lower highs.
- This indicates that despite the price rising, momentum is weakening, suggesting a potential reversal to the downside.
How to Spot It:
- Look for discrepancies between the price chart and the oscillator.
- For bullish divergence, find lower lows in price, but higher lows in the oscillator.
- For bearish divergence, find higher highs in price, but lower highs in the oscillator.
2. Hidden Divergence
Hidden divergence signals a potential continuation of the trend. It occurs when the price moves in the direction of the trend, but the oscillator moves in the opposite direction. Hidden divergence can also be either bullish or bearish.
-
Bullish Hidden Divergence:
- Price forms a higher low, but the oscillator forms a lower low.
- This suggests that the bullish trend is likely to continue, even though the oscillator shows a loss of momentum.
-
Bearish Hidden Divergence:
- Price forms a lower high, but the oscillator forms a higher high.
- This suggests that the bearish trend is likely to continue, even though the oscillator shows a loss of momentum.
How to Spot It:
- For bullish hidden divergence, look for higher lows in price and lower lows in the oscillator.
- For bearish hidden divergence, look for lower highs in price and higher highs in the oscillator.
How to Use Divergence:
- Divergence should be used in conjunction with other technical analysis tools, like support/resistance, trendlines, and candlestick patterns, for confirmation.
- Always manage risk with proper stop losses and position sizing, as divergence signals are not foolproof and can lead to false signals.
By understanding and identifying these types of Forex divergence, traders can make more informed decisions and improve their trading strategies.