Technical indicators: trading divergences

Divergence is one of the most efficient trading concepts that offer reliable high-quality trading signals. The most curious thing is that it owes its accuracy to the lagging action of oscillators.

Divergences are a big part of many traders’ strategies. Some use them to identify beneficial entry points, others to choose a proper time for exiting their positions. In this tutorial, we will tell you how to spot and trade these cross-functional trading patterns.

Divergence: definition

Let’s start with identifying what is a divergence. Basically, divergence means that the price chart and the technical indicator (oscillator) you use for analyzing the market go in opposite directions. It is the first signal for you to understand that “something” is happening on your chart.

Divergences can be bearish or bullish. 

Regular bearish divergence

A bearish divergence occurs when the price creates higher highs on the chart, while your indicator makes lower highs. After such bearish divergence prices normally move downwards: the price needs to catch up with the lower indicator.  

Regular bullish divergence

A bullish divergence (also called “convergence”) occurs when the prices create lower lows on the chart, while your indicator shows higher lows. That is the first indication that prices are going to pick up soon: the price needs to catch up with the higher indicator.  

Note that when we talk about bearish divergences we are looking at highs in the price chart. When we talk about bullish divergences, we are talking about lows.

In addition to regular divergences, there are so-called hidden divergences.

Hidden bearish divergence

A hidden bearish divergence occurs when the price creates lower highs on the chart, while your indicator makes higher highs. The absence of new highs on the price chart shows that bulls are losing strength. Despite the higher high of the oscillator the movement up is likely a retracement. This movement represents an opportunity to sell at higher levels.

Hidden bullish divergence

A hidden bullish divergence occurs when the price creates higher lows on the chart, while your indicator makes lower lows. The absence of new lows on the price chart shows that bears are losing strength. Despite the lower low of the oscillator the movement down is likely a retracement. This movement represents an opportunity to buy at lower levels.

Experience shows that it’s easier to spot regular divergences than hidden ones.

Type

Price

Oscillator

Description and Trading

Regular: expect a reversal

Bearish

Higher High

Lower High

Potential reversal to the downside

Bullish

Lower Low

Higher Low

Potential reversal to the upside

Hidden: expect correction and continuation

Bearish

Lower High

Higher High

Downtrend will likely resume

Bullish

Higher Low

Lower Low

Uptrend will likely resume

Divergences are normally used for forecasting price corrections and reversals. They are likely to occur before the actual price action. That is something that makes them so effective and allows traders to enter a trade right at the very beginning of the new emerging price move.

How to trade a regular divergence

For trading divergences, you need to insert one of the oscillators into your chart:

Regardless of the indicator you choose, we recommend you always place Stop Loss orders before making your trading bets. It is no different when you trade divergences. You may put a Stop Loss above the last top on the chart which confirms the occurrence of bearish divergence. If the divergence you are dealing with is bullish, you should place a Stop Loss below the last bottom on the chart.

To find a place for a Take Profit order you will probably need an additional indicator (especially if you trade with RSI and Stochastic). You may use swing analysis or support/resistance levels for setting Take Profit. However, if you prefer using MACD while trading divergences, then you could fully rely on this indicator alone without any supplementary trading tools. When the MACD histogram crosses the signal line upside down, it’s a signal to close a bullish position. When the MACD histogram crosses the signal line bottom up, it’s a signal to close the bearish position.

Divergence trade with MACD oscillator

Here is an example of divergence trade with MACD oscillator.

Bullish divergence and MACD chart 

Suppose you found a bullish divergence (convergence) between the MACD and the price chart. In addition, you notice a bullish crossover in the MACD window. You use this price divergence as a signal to open a long position. A Stop Loss order should be placed below the last bottom of the price. Close your trade when the bearish crossover on the MACD oscillator is formed.

Frequently asked questions

  • How to withdraw the money you earned with FBS?

    The procedure is very straightforward.  Go to the Withdrawal page on the website or the Finances section of the FBS Personal Area and access Withdrawal. You can get the earned money via the same payment system that you used for depositing. In case you funded the account via various methods, withdraw your profit via the same methods in the ratio according to the deposited sums.

  • How to open an FBS account?

    Click the ‘Open account’ button on our website and proceed to the Personal Area. Before you can start trading, pass a profile verification. Confirm your email and phone number, get your ID verified. This procedure guarantees the safety of your funds and identity. Once you are done with all the checks, go to the preferred trading platform, and start trading. 

  • How to start trading?

    If you are 18+ years old, you can join FBS and begin your FX journey. To trade, you need a brokerage account and sufficient knowledge on how assets behave in the financial markets. Start with studying the basics with our free educational materials and creating an FBS account. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.

  • How to activate Level Up Bonus?

    Open Level Up Bonus account in web or mobile version of FBS Personal Area and get up to $140 free to your account.

Latest news

How to trade the JPY?

Happy Friday, traders! Are you ready to trade at the end of the week? Here’s what you need to know before you start:

FOMC Minutes Brought Insights

Hello, dear traders! We hope you have a great day! Let’s see what news is worth following today! Market closing US stock exchanges will be closed due to the Thanksgiving holiday…

US Dollar Might Get Under Pressure After These Events

Today, two events will shake the US dollar. First, at 16:45 GMT+2, Markit, a statistical company, will release the US Flash Services PMI. Moreover, at 21:00 GMT+2, the Federal Reserve will release its meeting minutes.

Deposit with your local payment systems

Feel the Team Spirit

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Follow us on Facebook

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera