Bullish and Bearish Divergence

A Divergence is a lack of symmetry between the price and the indicator used. Generally a momentum indicator is expected to follow the price direction but if the indicator gets out of sync with the price, it is taken as a shift in momentum. If in a downtrend, the price hits a new low keeping the trend intact but the indicator fails to hit a new low, it is called a Bullish or Positive Divergence as the internal momentum is slowing down at that point. The reverse, if seen in an uptrend, is called a Bearish or Negative Divergence.

How to Use Bullish and Bearish Divergence in Forex Trading


Advantages And Limitations of Bullish and Bearish Divergence

A trader can use any momentum oscillator but more reliable signals can be expected from MACD (Moving Average Convergence Divergence), especially MACD Histogram. A Positive Divergence in MACD Histogram may be watched but should not be taken as a bullish signal as long as it stays below the zero line. If a second divergence appears with the line going barely below the zero line, any price confirmation can be taken as a buy signal with a proper stop loss. This kind of Double Divergence is much more reliable and applicable for similar sell signals in an exhausted uptrend too.

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