This means that there were more and larger bullish candles in the most recent trend wave than there were compared to the previous wave. When the RSI makes an equal high, it does not qualify as a divergence because it just means that the strength of the uptrend is still up and stable.

Higher highs on the RSI do not show a reversal or weakness. It just means that the trend is progressing unchanged. This is what we call a divergence and in the screenshot below, the divergence signaled the end of the uptrend and it makes a downtrend possible. Classic technical analysis tells us that a trend exists when price makes a higher high — but like too often, conventional wisdom is seldom right and usually simplifies things too much. A trader who only relies on highs and lows for his price analysis often misses important clues and does not fully understand market dynamics.

Spotting a divergence on your momentum indicator, thus, tells you that the dynamics in the trend are shifting and that, although it could still look like a real trend, a potential end of the trend could be near. A divergence does not always lead to a strong reversal and often price just enters a sideways consolidation after a divergence. Keep in mind that a divergence just signals a loss of momentum, but does not necessarily signal a complete trend shift. A divergence alone is not something that strong enough and many traders experience bad results when trading only with divergences.

Just like any trading strategy, you need to add more confluence factors to make your strategy strong. Below we see how price made 2 divergences but price never sold off. The divergences, thus, just highlighted short-term consolidation. Location is a universal concept in trading and regardless of your trading system, adding the filter of location can usually always enhance the quality of your signals and trades. The screenshot below is a great example: On the left side, you see an uptrend with two divergences. However, the first one completely failed and the second one resulted in a massive winner.

What was the difference? When we take a look at the higher time frame on the right we see that the first divergences happened in the middle of nowhere and the second divergence formed at a very important resistance level yellow line and yellow arrow. Such an approach will impact your performance in a big way. Divergences are a powerful trading concept and the trader who understands how to trade divergences in the right market context with the correct signals can create a robust method and effective way of looking at price.

Thank You, Rolf! Good article, especially these comments : When we take a look at the higher time frame on the right we see that the first divergences happened in the middle of nowhere and the second divergence formed at a very important resistance level yellow line and yellow arrow.

Complex trading system #3 (MACD Divergence) | Forex Strategies & Systems Revealed

Very helpful to master the market! To date i have not found a trading strategy with a higher winning percentage than divergence combined with support and resistance levels. Thanks Rolf for this interesting article. I was aware of this but you showed me the correct way.

This article will surely help me in my trading strategies. Personally I cannot trade divergences as they will always happen when a market is very strong or very weak. This is because price can keep making higher highs or lower lows but the indicator cannot as it has levels that it cannot go beyond. They are so common that you will get stopped out repeatedly. Thank you Rolf, this realistic and smart article has shown the way and greatly benefited me, thank you again. Dear Rolf, I happen to see your article when I was browsing for divergences, I personally a strong believer in trading with divergences and I just always wonder why many times my divergences based trades were failed and now I understood clearly that combining the divergences along with support and resistance is something more crucial for spotting winning trades.

Divergence Trading System - Bullish and Bearish Divergence Forex Trading

Save my name, email, and website in this browser for the next time I comment. This content is blocked. Accept cookies to view the content. This website uses cookies to give you the best experience. The bullish divergence has absolutely the same characteristics as the bearish divergence, but in the opposite direction.

Divergences trading signals

We have a bullish divergence when the price makes lower bottoms on the chart, while your indicator is giving you higher bottoms. After a bullish divergence pattern, we are likely to see a rapid price increase. However, there is a third kind of a divergence, which does not fall into the regular divergence group. This is the Hidden Divergence pattern.

We have a hidden bullish divergence when the price has higher bottoms on the chart, while the indicator is showing lower bottoms. As you probably guess, this type of divergence has the same character as the hidden bullish divergence, but in the opposite direction. We confirm a hidden bearish divergence when the price is showing lower tops, and the indicator gives higher tops. The regular divergence pattern is used to forecast an upcoming price reversal. When you spot a regular bullish divergence, you expect the price to cancel its bearish move and to switch to an upward move.

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When you see a regular bearish divergence, you expect the price to cancel its bullish move and switch to a downward move. Divergence trading is an extremely effective way to trade Forex. The reason for this is divergence formations are a leading signal. This means that the divergence pattern is likely to occur before the actual move. This way, traders are able to anticipate and enter a trade right at the beginning of the new emerging move.

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Since we discussed the four types of divergence patterns, we will now talk about the importance of the divergence indicator. As I said, you need an indicator on your chart in order to discover divergence. The reason for this is that the price has to be in a divergence with something.

It is simply impossible to trade divergence without having an extra indicator on the chart. So the question becomes, which indicator or indicators are best for divergence trading? The MACD is a moving average based indicator , where a signal could be taken on a crossover. In this manner, the indicator basically has a lagging character. However, the lagging character of the MACD concerns only its primary signal — the crossover signal. The indicator also has two leading functions.

The second one concerns MACD for divergence trading. Although the MACD is a lagging indicator in general, the divergence signal it gives us, is considered to have a leading character. The image below will show you how MACD divergence trading works. At the bottom of the chart we have the MACD indicator, which is used to spot a bullish divergence. The blue lines on the chart show the divergence itself. At the same time, the MACD creates higher bottoms. This scenario provides a nice opportunity for a long position. Another common oscillator used for divergence trading in Forex is the Stochastic Oscillator.

The Stochastic consists of two lines which interact frequently between each other. At the top and the bottom of the indicator there are two areas — overbought and oversold areas. The Stochastic indicator can be used for overbought and oversold readings. This is its primary purpose. However, the Stochastic Oscillator is an excellent tool for recognizing divergence trade setups.

367# Divergence Trading System

In order to find a divergence between price action and Stochastic, you should look for discrepancies between the price direction and Stochastics tops or bottoms. It acts the same way as with the MACD. The reason for this is the dynamic character of the Stochastic. It simply gives more opportunities than the MACD. However, since the signals can be more frequent, many of them might be false signals which need to be filtered out. Have a look at the image below. There are two divergences on the chart, which gives an opportunity for two trades.

We start by analyzing the first case. We observe higher tops on the chart, while the Stochastic Oscillator creates lower tops. The price starts decreasing afterwards. However, the Stochastic suddenly starts closing with higher bottoms. This is the second divergence pattern. The Relative Strength Index is another good indicator to build a successful Forex divergence system. The RSI indicator consists of a single line, which moves between an overbought and oversold zone.