Bullish and Bearish Divergence Signals In Forex Trading

Bullish divergence is the rising price highs in an uptrend while corresponding highs in the momentum indicator are declining

Bearish divergence is the declining price lows in a downtrend while corresponding lows in the momentum indicator are rising.

Momentum indicators are normally used more as overbought/oversold indicators with levels above an upper level between 70 and 80 suggesting potential for a reversal lower and a lower level between 20 and 30 suggesting potential for a reversal higher.

When used carefully with strong reference to price these signals can be quite accurate. However, it is also possible to utilize momentum indicators to warn of a deceleration of a trend and subsequent risk of and end to the trend.

The latter signals are normally highlighted by what are known as "divergences." These can be defined as:

Bullish divergence: Rising price highs in an uptrend while corresponding highs in the momentum indicator are declining

Bearish divergence: Declining price lows in a downtrend while corresponding lows in the momentum indicator are rising.

When price and momentum direction begin to diverge in this manner it is basically identifying that the speed of the trend is beginning to lose momentum and as such there is greater risk for the trend to reverse.

Note how in this diagram that price has been rising in a sequence of higher highs and lower lows (an uptrend) but over the last three price peaks the corresponding RSI has marked lower peaks in the indicator.

The chart above shows three examples of divergences. The first towards the left of the chart is a bullish divergence where price has been...Read more

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