Divergence is one of the trade setups used by Forex traders. It involves looking at a chart and one more indicator. For our example we shall use the RSI indicator. To spot this setup find two chart points at which price makes a new swing high or a new swing low but the RSI indicator does not, indicating a divergence between price and momentum.
Example:
In the chart below we identify two chart points, point A and point B (swing highs). Then using RSI indicator we check the highs made by the RSI, these are the highs that are directly below Chart points A and B. We then draw one line on the chart and another line on the RSI indicator.
How to spot divergence
In order to spot divergence we look for the following:
- HH=Higher High- two highs but the last one is higher
- LH= Lower High- two highs but the last one is lower
- HL=Higher Low- two lows but the last one is higher
- LL= Lower Low- two lows but the last one is lower
First let us look at the illustrations of these terms
There are two types of divergence:
- Classic
- Hidden
