How does Forex divergence trading work? Discover how to find bullish and bearish divergence

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Forex divergence trading – a strategy for your success

Hello, and welcome to today’s video, by Diary of a Trader. And today, we’re going to go over divergences. And you may have heard of them before, you may have even seen some type of explanation on them, but I would really like to go through with you and kind of do just a real quick rundown of what a divergence is.

We’re really only going to be focusing on two kinds, Regular and Hidden Divergence. And to do this, we need an indicator to help us. Well, an indicator has to be used like an oscillator, like the MACD, or the RSI, and if we’re in TradingView, just type in RSI in Indicators and Strategies, and here we get the RSI, Relative Strength Index. And so, what we’re looking for is something that does not appear to be in structure with price and the oscillator. What we like to see is this kind of activity, right here. This is a sign of some normal activity, where we have, price is rising and the RSI is rising. And we’re getting the same kind of higher lows and the same kind of higher highs. A divergence appears when we are noticing that the change is different. And so, an example right now, just looking at the screen here, is called, Regular Bearish Divergence… Bullish Divergence, sorry. So, Bullish Divergence usually occurs near the end of a down move and signals either a long-term or short-term trend change. And so, what we look for in Bullish Divergence is we want to see, in price, we want to see that there are lower lows. But then, in the oscillator, we want to see higher lows. So, here we have lower lows in price, but then we have higher lows in our oscillator. And so, what this is telling us is that while price is, going down the momentum to push it down is not there, it’s not very honest. And what this is telling us is that as we’re moving forward in time and prices are continuing to move forward in time, we’re actually getting a lot more momentum and volatility inside the price action itself. So, the divergence occurs when we have lower lows in price, but higher lows in our oscillator, and that’s an example of Regular Bullish Divergence.

Now, Regular Bearish Divergence, that’s just the inverse, so what we’re looking for in Regular Bearish Divergence is, usually occurs at the top, or near the top of an uptrend. So, we have a clear uptrend here, and then what do we notice? We see a difference here. There’s a high, here’s a high and then here’s a higher high, but there’s a lower high right here. So, this is really just the inverse of Bullish Divergence, this is Bearish Divergence. And so, what we notice when we see Bearish Divergence is we have two points of higher highs, but then we have lower highs in the oscillator, alright? And we can see that when these appear we generally have a high probability of prices correcting themselves and going in the direction of the title of the divergence, so if this is Regular Bearish Divergence, then we expect prices to fall down.

Now, probably, one of the more misunderstood and more difficult to locate is Hidden Divergence. And Hidden Divergence… Okay, so, Regular Divergence tells you that something in a trend is about to change, like, it signals the possibility of a change in direction of the overall trend. Hidden Divergence occurs within the trend and it tells you that the trend is going to continue. So, think of just a pullback. You know, a pullback will usually signal that we’ve had some type of Hidden Divergence. So, hidden doesn’t mean it’s sneaky, Hidden Divergence just means that it is within the trend. So, if we have an uptrend like we did right here, so we’re looking for, in Hidden Divergence, we’re looking for higher lows in price, but lower lows in the oscillator. And sometimes, these are a little bit more difficult to find because they don’t happen as frequently. And if we’re looking for it in an uptrend, sometimes we’ve got to zoom back a bit here and see if we can find some higher lows in price, but lower lows in the oscillator. Sure, right here. This is a perfect one. So, a sign that we may continue higher in the uptrend is right here. This is a good example of Hidden Bullish Divergence. And I tell you what, when you can start to spot Hidden Divergences as easily as you can Regular Divergences, this is where you’re going to get a lot of your positive trades, making a lot more money, because Hidden Divergence is, I feel like it’s more powerful and it’s more confirmatory of a move continuing or going in that direction than a Regular Divergence. That’s just my opinion, but Regular Divergence, again… Or Hidden Divergence occurs within a trend, so we have this move up, okay, and we see prices coming down, trading back up, and then what would have you done right here? If you were long down here and you saw this big red bar paint on the screen, you’d probably consider going short, especially when you see price traveling down. But, if we would’ve looked at our oscillator here, we see that the price continues to move higher, the lows get higher, but in the oscillator, our lows are getting lower. And so, what this tells us is that there is not a lot of momentum in the downward’s pressure of the current trend, is telling us that it’s inherently weak, that this drive down is weak. And so, when we start to see it bounce out of the zone, we can expect to see prices to continue higher for an undetermined amount of time. So, this is an example of Hidden Divergence and that is… Hidden Bullish Divergence is higher low in price, but lower lows in our oscillator. And to identify some Hidden Divergence in a bear trend, so Bearish Hidden Divergence, we’re looking for lower highs in price, but higher highs in the oscillator. And again, sometimes those are hard to find as well, so we’re looking for lower highs in price and higher highs in the oscillator, and probably right here, this is a good spot. It’s not the steepest, but it is still technically a higher high. Oops, we have lower high here. So, this is Hidden Bearish Divergence. Again, this occurs within the trend, so it tells us that the trend is going to continue, it tells us that we have not met a reversal. So, you see these higher highs in our oscillator, but lower highs in price, and again, this is just the inverse of the Bullish Hidden Divergence, where we see that even though prices are rising… As prices are going down, it’s still strong to move down. We’re not getting enough oomph to trade it higher. And so, this is an example of Hidden Bearish Divergence.

So, those are the two primary kinds of divergence that you will spot in the markets and implementing these into your charts, that is going to be a very, very powerful form of analysis, something very easy and you can go back and practice this, just throw up the RSI in your chart and you can go back and just, markdown and practice looking through past price actions and find those divergences within price and the oscillator and see how many of them you can spot as you move. When you have these on daily charts, divergences that appear on daily and weekly charts, are going to be extremely powerful and very, very relevant, and when they show up they are powerful movers. You know, especially if we look back to where the low of the Euro was, back in December of 2016, we saw this amazing divergence appear. And, when that showed up, we just kind of triggered a very long Bull run in the Euro. And so, when you notice divergences, be very, very aware of them because they are powerful signals. It turns lagging indicators into leading indicators. It gives you an early warning sign that nobody else has seen, that lets you know that prices are about to reverse, or continue with Hidden Divergence. So, I hope we found this video interesting, and I look forward to talking to you later in our next video. Bye-bye.