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BULLISH AND BEARISH DIVERGENCE

https://www.thinkmarkets.com/uk/learn-to-trade/indicators-and-patterns/general-patterns/what-is-bullish-and-bearish-divergence/

Some of the most successful forex traders will tell you that a forex divergence trading strategy is one of the most accurate strategies you can use. This is because the strategy not only makes use of information that is on the charts, but also uses candlesticks that provide clear information about what buyers and sellers are doing in the market. 

What Is a Divergence?

Divergence simply means to deviate from, or to do something distinctive from what another entity is doing. This definition should provide a clue as to what a divergence setup is. The forex trading divergence strategy employs the use of any suitable oscillator such as the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD) indicator. 

What is Bullish Divergence?

A price chart showcasing bullish divergence is characterized by the formation of progressively lower lows by the price candles when the signal line of the oscillator forms progressively higher lows. It does not matter whether it is a bullish divergence RSI signal or a bullish divergence MACD signal: the principle of spotting and trading the divergence is the same. The sole difference is that a bullish divergence RSI signal uses the price troughs formed by the single signal line to detect the divergence. The bullish divergence MACD signal uses the point of the cross between the MACD lines in the indicator window as the reference signal from the oscillator. 

What is Bearish Divergence?

A price chart showing bearish divergence is characterized by the formation of progressively higher highs by the price candles in the presence of progressively lower peaks formed by the oscillator’s signal line. This setup can occur in the form of a bearish divergence RSI signal or a bearish divergence MACD signal. The sole difference is that a bearish divergence RSI signal uses the price troughs formed by the single signal line to detect the divergence, while the bearish divergence MACD signal uses the peaks of the MACD lines in the indicator window as the reference signal from the oscillator. The example demonstrated below is that of a bearish divergence MACD signal.

The RSI can in addition, be used to spot a bearish pattern of divergence. 

What is Hidden Bullish Divergence?

A hidden bullish divergence is a setup where the oscillator forms progressively lower lows at the same time that the price is forming higher lows. This setup is frequently seen in situations where the price has been in consolidation or has performed a pullback from an uptrend. This setup, therefore, indicates that price still has some upside momentum and that any pullback is more likely the outcome of profit taking from previous buyers as opposed to strong selling. The emergence of a hidden bullish divergence represents a signal that the prior uptrend is likely to continue. The hidden bullish divergence is presented in this setup below.

Cheat Sheet

https://www.babypips.com/learn/forex/divergence-cheat-sheet

DEFINITION

Divergence is a market condition in which the price and the indicator diverge or go in different directions. The signal of the upcoming price movement appears from this divergence.

The indicator is usually an oscillator placed below the price chart, so you can easily see divergence without applying additional tools.

A bullish divergence can also be called convergence. It's a market situation in which the price forms lower lows. At the same time, the indicator you chose has higher lows. It's the first signal that traders should bet on the upward rally. You know that indicators are used to predict the price direction. Thus, if the indicator moves upward, it means the price should rise, as well.

Bearish Divergence

A bearish divergence happens when the price forms higher highs, but the indicator creates lower highs. Usually, the price goes down after bearish divergence forms. The downward movement occurs because the indicator is more important in defining the coming price direction. If the indicator goes down, it signals the price will go down.

It may seem challenging to remember all these highs and lows, so here's a way to remember: 

With bearish divergence, we look at the price chart's highs. 

For a bullish divergence, we look at the price chart's lows.

Hidden Bearish Divergence

Hidden bearish divergence is when the price forms lower highs, but the indicator creates higher highs. The lack of higher highs on the price chart is an indication that bulls are not in force anymore.

We already mentioned that the indicator hints at the upcoming market direction. However, that's not the case with hidden divergence. Although the indicator forms higher highs and a trader may consider it a sign of upward movement, the market sees an opposite trend, and retracement will likely occur. Such a signal can be used to open a short position at higher levels. 

Hidden Bullish Divergence

Hidden bullish divergence is a market situation in which the price has higher lows. Still, the indicator forms lower lows. Although the indicator moves down, a lack of lows on the price chart signals bears' weakness. We expect the price to retrace. It's a great chance to open a long position at lower levels.

It's not easy to keep all these signals in your head, so we created a table that will help you understand the differences. Use it to read

Key Tips About Divergence

Divergence is an easy tool. That said, it has the features you should never forget to use correctly: 

Divergence can be found on any timeframe.

Divergence can be used for any asset.

The indicators that form divergence on a price chart are usually oscillators.

Divergence provides both bullish and bearish signals.

Both regular and hidden bearish forms of divergence are formed with highs. It's vice-versa when looking for regular and hidden bullish divergence. In that case, you'd look at lows.

Regular divergence signals a high probability of a market reversal. Hidden divergence indicates a correction and continuation of the previous price movement.

Divergence isn't used to identify a perfect entry/exit point. However, it can provide the necessary information about the way the price direction might go.

What Is Bullish Divergence?

Bullish divergence is a market condition in which the price forms lower lows. At the same time, the indicator you chose has higher lows. It's the first signal that the price may rise soon.

What Is Bearish Divergence?

Bearish divergence happens in which the price forms higher highs, but the indicators create lower highs. Usually, the price goes down after the formation of bearish divergence.

How Can You Identify Bullish Divergence?

You can locate bullish divergence when you see that the price is forming lower lows on the chart, while the indicator has higher lows.

What Does Hidden Bullish Divergence Mean?

Hidden bullish divergence is a market situation in which the price has higher lows, and the indicator forms lower lows. This kind of divergence predicts a possible price retracement. It's a great chance to open a long position at lower levels.

How Do You Detect Divergence?

Divergence is one of the easiest technical tools. All you need to do is apply an indicator (the list of the most reliable ones is given above) and check whether the price and the indicator are moving in different directions.

Which Indicator Is Best for Divergence?

We would highlight such indicators as the MACD, RSI and Stochastic Oscillator. Still, you can apply other indicators but be sure you do that in a demo account, not a real one.

What Is Bullish Divergence on MACD?

The MACD indicator forms highs and lows. If the indicator's highs/lows don't match the price's highs /lows, divergence is occurring.

How Do You Confirm RSI Divergence?

To confirm the RSI divergence, check whether the price forms different highs/lows than the RSI oscillator. Also, any signal needs confirmation. It's best to apply support/resistance levels, other technical indicators predicting the market reversal, candlestick and chart patterns.

What Causes Divergence?

Divergence is caused by the difference in price and indicator directions. It can happen when the indicator predicts the market direction that isn't yet visible on the price chart. One of the reasons for divergence is a change in the market sentiment.

How Do You Trade with Divergence?

To trade divergence signals, you need to remember divergence types. Check whether divergence is caused by highs or lows, and check the table we created for you. The key indicators are RSI, Stochastic Oscillator and MACD.

How Reliable Is Divergence?

Divergence is a highly reliable tool. Classic divergence is easier to detect and more effective. It's also important to know about hidden divergence.

How Do You Spot Bearish Divergence?

During bearish divergence, the price forms higher highs, but the indicators create lower highs. Usually, the price goes down after the formation of bearish divergence.

What Does Divergence Mean in Trading?

Divergence is a market condition when the price and the indicator go in different directions. It helps read the signal of the upcoming price movement.

https://libertex.com/blog/bullish-and-bearish-divergence-in-trading

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