How To Trade Forex

What Is Divergence in Trading and How To Trade These Market Divergences Profitably?

Divergence – What is It?

Divergence is the financial markets – be it forex, stocks or crypto – is basically when the market is doing something very different from what common analytical tools – i.e. popular oscillator-type indicators (Relative Strength Index, Stochastics, Williams %R) will suggest.

When the market is making a series of higher highs and higher lows, but the indicator you chose, for example, the RSI, is doing lower highs and lower lows, then divergence is happening.

What Does Divergence Mean for Traders?

Divergence is one of the most powerful INTERPRETATIONS of indicators that a trader must know and be able to recognise.

The reason for this is that divergence will often signal a very powerful correction – in forms of big retrace or reversal – is about to happen.

Timber Falling Picture

When is a Big Pullback or Price Reversal Most Likely to Happen Based on Divergence?

Have you ever experienced scenarios in your trading where you notice based on your indicators and maybe also third-party analysis – investing.com, fxstreet.com – that the market is very overbought or very oversold, and yet it keeps going and going?

Then, you may want to pay attention for signs of divergence to signal when that could happen.

Look at this picture.

In this example, we are looking at MACD divergence.

Forex Divergence Trading Example

Look at how the price fell after that?

Video on Market Divergence and How To Trade It

This is a video I recorded (while I was taking a dump) so it may be echo-ey. Pardon the echos (and toilet humour), I just wanted to get it done before I lost the train of thought!

For more in depth examples, join my Forex Learning Group – where you can check out my series of lesson videos in a private students-only forum, join in my weekly webinars, and students Telegram chat group where you can ask me questions, and tune into regular market analysis pictures and videos to help you find the best trading setups! In addition, those who open accounts of over $1000 through me also get to receive my #FIREYOURBOSSV2 EA for Free, Worth $699!

Good Trading,

Julian

The Forex Lab

P.S. This is my first post on divergence so I’m keeping it basic. Actually there’s more to be learnt in the above screenshot regarding MACD divergence. In the next post on this topic I will also be sharing with you what is “Hidden Divergence” and how that is different from “Regular Divergence”.

About the author

Julian Wong

Dad of 3 Kids. Son of floor-traders/broker parents. Born with ADHD and Aspergers which makes me "emotionally retarded" (according to my wife), but that also gives me special abilities in pattern recognition. Been involved in financial derivatives since 16. Enjoys playing tennis. Sings like Josh Groban. Aspiring to DJ in large music festivals.

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