A condition where price moves in one direction while a technical indicator moves in the opposite direction, often signaling a potential trend reversal or weakening momentum.
What Is Divergence?
Divergence occurs when the price of a currency pair and a momentum indicator (such as RSI, MACD, or stochastic) disagree about direction. If EUR/USD makes a new high but the RSI makes a lower high, this bearish divergence suggests the uptrend is losing strength. The opposite, bullish divergence, happens when price makes a new low but the indicator makes a higher low.
Types of Divergence
Regular divergence signals potential reversals: bearish regular divergence (higher price highs, lower indicator highs) and bullish regular divergence (lower price lows, higher indicator lows). Hidden divergence signals trend continuation: bullish hidden divergence (higher price lows, lower indicator lows) and bearish hidden divergence (lower price highs, higher indicator highs).
Trading Divergence in Forex
Divergence is a leading signal, meaning it appears before the reversal begins. However, divergence can persist for extended periods before price actually turns, so traders use it as an alert rather than an immediate entry trigger. Combine divergence with support-and-resistance levels, Fibonacci Retracement zones, or candlestick reversal patterns for confirmation. The most reliable divergence signals occur on the 4-hour and daily charts, where noise is filtered out.
Related Terms
Convergence
A condition where price action and a technical indicator move in the same direction, confirming the current trend's strength and suggesting it is likely to continue.
RSI (Relative Strength Index)
A momentum oscillator that measures the speed and magnitude of recent price changes on a scale of 0 to 100. Readings above 70 suggest overbought conditions; below 30 suggest oversold conditions.
MACD (Moving Average Convergence Divergence)
A trend-following momentum indicator that shows the relationship between two exponential moving averages. The MACD line, signal line, and histogram together help identify trend direction, momentum shifts, and potential entry points.
Momentum Indicator
A basic oscillator that measures the difference between the current price and the price a set number of periods ago. Unlike the percentage-based Rate of Change, momentum uses absolute price difference and oscillates around zero.
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