Divergence and Convergence Bullish and Bearish Reversal Analysis

By Oktober 14, 2021 September 13th, 2022 Forex Trading

Divergences, whether bullish or bearish in nature, have been classified according to their levels of strength. Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Spot Gold and Silver contracts are not subject to regulation under the U.S. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite.

A hidden bullish divergence is shown in the AUD/USD chart below. The price makes a higher low while the RSI charts a lower low. This divergence is considered hidden because the price chart features the diverging low while the indicator shows a continuation of lower lows.

The Bullish Divergence Candlestick Pattern – Pros and Cons

The Stochastic consists of two lines which interact frequently between each other. At the top and the bottom of the indicator there https://forexarticles.net/ are two areas – overbought and oversold areas. The Stochastic indicator can be used for overbought and oversold readings.

bullish and bearish divergence

Divergence refers to the difference in movement between an oscillating indicator, such as MACD, CCI, RSI, Stochastic, etc., and the price action of the underlying financial instrument. Divergence and Convergence confirm that trader must close the order which has agreeing direction with a market trend. A Divergence has formed on the next waves where market trend had an upward direction and RSI trend declined.

Stochastic Oscillator

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In addition, you notice a bullish crossover in the MACD window. You use this price divergence as a signal ice bofa us corporate index to open a long position. A Stop Loss order should be placed below the last bottom of the price.

What Is Regular or Classic Divergence?

However, hidden divergence can be challenging for you if you’ve never worked with it. The oscillator consists of two lines that form tops and bottoms, and divergence is based on them. All you need to do is check whether the oscillator formed a high or low that doesn’t correlate with the price’s high/low. The MACD indicator is a lagging indicator, which means that its signals occur late. In analytics, there’s a chance you’ll come across the term divergence.

The lack of higher highs on the price chart is an indication that bulls are not in force anymore. As with many chart patterns and concepts, divergences must be noted about their time frames. In other words, it can be easy to miss the bigger picture while being too focused on the present. Divergence occurs when price makes higher highs, eur/dkk fx while indicators paint lower lows or vice versa. Simply put, divergence is when price direction contradicts indicator direction, creating a noticeable conflicting pattern. The relative strength index is an oscillator that is used to assess the direction of market momentum – meaning it can identify divergences and hidden divergences.

Divergence patterns are technical price analysis patterns and indicate the possibility ofchanging the price trend. When two consecutive price ceilings are formed in the price chart, but the used indicator forms an opposite trend. This is indeed a significant psychological level, and we haven’t seen any weekly or monthly candles that closed below this level. On the RSI indicator, we have a bullish divergence on this daily chart, and we also have another triple bullish divergence on the weekly chart as well!

What Is Bullish Divergence?

On an upward market trend with higher peaks, MACD shows a downward trend in which new peaks are lower than earlier peaks. Chart patterns Understand how to read the charts like a pro trader. Regular divergence is where the price signal creates higher highs or lower lows while the indicator makes lower highs or higher lows respectively. In addition to classic divergences, there are so-called hidden divergences. Divergence is one of the most efficient trading concepts that offer reliable high-quality trading signals.

Divergence is one of the well-known market conditions that provide reliable signals on the upcoming market direction. We have further defined this signal as a period of diverging trends between prices and the indicator when the indicator has been making peaks in the “overbought” territory. This is representative of a market that is becoming more bearish. However, the RSI technical indicator I have applied is showing a series of higher lows, which is indicative of an improving trend.

Is MACD a leading indicator?

Is MACD a Leading Indicator, or a Lagging Indicator? MACD is a lagging indicator. After all, all of the data used in MACD is based on the historical price action of the stock.

This is what we call a divergence and in the screenshot below, the divergence signaled the end of the uptrend and it makes a downtrend possible. After a period of price increase, the Momentum Indicator starts recording lower top while price is making higher highs. This is a bearish divergence between the price action and the Momentum Indicator. Then, we see a large bearish candle, which breaks the Moving Average line between the bands. At the same time, the Bollinger Bands start expanding, indicating higher volatility. Subsequently we see a price drop of about 8% over the next three weeks.


These Patterns, along with other asset price analysis factors, can be considered a suitable supplement to reduce the amount of analysis risk. Trading divergence can be very profitable if traders can reliably identify divergence by making use of the trading tools in their arsenal. However, like all trading strategies, using divergence indicators involves a certain degree of risk. Divergence is only a signal that indicates that the price’s momentum is changing, and does not guarantee a trend reversal or pullback.

Even though a trend could look “healthy” at first glance , it might be losing momentum at the same time when we look deeper at the candles and the momentum. We have all the tools that we need into order put a Forex divergence is oanda legit trading plan together. We will use the MACD indicator for spotting divergence and for closing trades. When we see discrepancies between price action and MACD, we will enter trades based on a divergence signal.


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