Visual disagreement between the actual price on a chart and a technical indicator in forex trading is called divergence. This disagreement can be seen on any time frame and often happens numerous times per divergences, providing opportunities for successful trading. The concept is simple, although many will also forex that the effectiveness of divergence is down to the thousands of traders who act on this signal. It can be learned by any trader, but the ability to spot genuine divergence is a skill which is acquired through practice and close observation of the market. Divergence basically means moving in different directions. In terms of trading, divergence occurs when the price goes in one direction while divergences indicator — appropriately enough, called a divergence indicator — divergences in a different direction. Divergence indicators are momentum — market strength — indicators. They signal possible market tops and bottoms. Divergence indicators are also used to indicate overbought or oversold conditions in a market. This can be particularly important in forex tradingforex economic data surprises often result in an exaggerated market reaction that is retraced in subsequent price action. Divergence indicators help forex traders identify price levels that may represent such excessive reactions, price points from which they can then initiate trades to profit from the market sudden movement. A divergence occurs when a new high in a price trend is not confirmed by a corresponding new high on the oscillatorbut instead is contradicted as the oscillator registers a new low. Divergences can occur on all kinds of oscillators, and they signal that the trend is in peril of forex strength, possibly even reversing. As usual, the signals they emit can easily be contradicted by the eventual price action, and the trader should always be cautious when interpreting them. A regular divergence is used as a possible sign for a trend reversal. If price is making lower lows, but the oscillator is making higher lows, this is considered to be regular bullish divergence. This normally occurs at the end of a down trend. Now, if the forex is making a higher high, but the oscillator is lower high, then there is a regular bearish divergence. This type of divergence can be found in an uptrend. After price makes that second high, if the oscillator makes a forex high, then you can probably expect price to reverse and drop. Regular bearish divergence indicates a fall in the price to come. In this case, since we are in an uptrend we should expect a retrace. After entering at the top, we should look to get out of the trade at the uptrend line. Unlike normal divergences, hidden divergences are forex signal of trend continuation and not reversal. A hidden bullish divergence occurs when price is making higher lows, but the oscillator makes lower lows. When this happens, divergences need to look for a spot to go long on an asset. When the security is making lower highs, but the oscillator is making higher highs, we are spotting for a hidden bearish divergence to go short on a continuation of the down move. If you are using trend lines, for example, you also need to look for maybe a candlestick formation that will show you that price has rejected the trend line and is in fact going to continue with the up move. Most of the technical indicators used to observe divergence are momentum oscillators. These indicators that provide a sense as to the strength of a move seen in the market. Some momentum oscillators are used to determine whether a market is overbought or oversold and hence might be subject to a correction. Popular examples of banded oscillators that measure market momentum include the aforementioned Relative Strength Index RSI and the Stochastic Oscillator. Now we know how to spot divergence and how to enter the market on a divergence. However, before you start trading divergence setups, there are a few more points which we need to discuss further. These things include an example money management approach when trading divergence setups. If you do not have a solid money management plan you are likely to lose money trading divergences or any other setups for that matter. Regardless of the trading method you use, you should always use a Stop Loss order for each of your trades. It divergences no different when you trade divergences. And for most traders, it is best to place a hard stop in the market instead using a mental stop. As far as the divergence setup goes, one way to place your stop loss would be put it right above the last top on the chart, which confirms the bearish divergence. If the divergence is bullish, then we rely on bottoms and the stop should be placed below the last bottom on the chart. Your email address will not be published. Laino Group divergences number IBC Please note that trading in leveraged products may involve forex significant level of risk and is not suitable for all investors. You should not risk more than you are prepared to lose. Before deciding to trade, please ensure you understand the risks involved and take into account your level of experience. Seek independent advice if necessary. Open trading account Clients area. Register your Practice account divergences Forex Fundamental Analysis Forex Recommendations Forex Blog Forex calendar Forex calculators. NEXT EVENT Next economic event: To receive new articles instantly Divergences to updates. Forex Divergences Written by: PaxForex analytics dept - Tuesday, 24 May 1 comments. Comments 1 Alaister H. Just started out doing forex trading and this really helped me out a lot. I find this really useful in many terms. Thank you for sharing this one out. Leave a forex Your email address will not be published. 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Thus, the second line above the 1000 line represents 3000 base pairs.