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Forex Divergence Strategy

Learning how to spot divergence on a Forex price chart can improve the profitability of your trading. In this article, I explain what divergence and its several sub-types are, how to best trade it, and how effective it tends to be as a sign to watch in Forex trades.

What is Divergence?

Divergence in Forex is quite often used to indicate the possibility of a trend change. Divergence can be found using various indicators, all of which are in the oscillator family. These include the MACD indicatorRSI, and others. The term “divergence” refers to when an oscillator shows a difference between momentum and price action. For example, if the value of the oscillator shows that the momentum of the market is shrinking while the price is rising, that is an example of divergence. This shows that the underlying momentum may be dropping, and therefore a lack of buying interest may come into the picture.

Divergence is used by traders on multiple time frames, but as with most technical analysis in Forex, it does tend to perform better on higher time frames. This makes sense considering that it takes so much more effort and trading volume to form a candlestick pattern or individual candlestick on a weekly chart than something smaller such as a five-minute chart. Furthermore, it should be noted that divergence typically is not in and of itself a reason to take a trade, but it gives you a bit of a “heads up” as to when to look out for a potential trade entry’s appearance. Most often, traders will find divergence on the chart and then look for their favorite candlestick set up or a break of support or resistance before making the final decision to execute a trade entry which is supported by the divergence.

How to Trade Divergence in Forex

In the price chart below, I present a daily chart of the USD/CHF currency pair. You can see that the chart has a large circle drawn at the top, where the market put in a top. Underneath, the MACD (Moving Average Convergence Divergence) indicator is highlighted by a large rectangle. Note that the moving averages that are part of the indicator have started falling from their absolute highs, while at the same time the price is rising. Furthermore, the histogram, which is the green and red bar pattern in the center, has gone from positive to negative while price continue to rise. This is divergence.

This situation suggests that perhaps the underlying momentum of the market is starting to fail a bit, which can be a warning that we may not be able to continue the overall move to the upside. While this is not necessarily a signal itself, it gives you yet another reason to think that maybe a sell signal would be worthwhile. In this case, it just so happens that there is significant support near the 0.9250 level and breaking down below that level further confirms that the trend is coming to an end and reversing.

MACD Divergence

This is a good example of how to trade divergence in Forex conservatively: wait for a divergence which is confluent with a reversal at a key support or resistance level.


What technical indicators do people use when looking for divergence?

Relative Strength Index

  • RSI is a momentum oscillator that measures the speed and change of price movements. James Welles Wilder Jr. invented the Relative Strength Index, and it’s still sometimes called Wilder’s RSI on some trading platforms.
  • RSI compares the strength of a market on its up days to the strength on its down days. The RSI formula compares the average gains when candles closed higher than the previous candle’s close to the average drops when candles closed lower than the previous candle’s close.
  • The most common setting in RSI is “14-period.” That means the RSI formula uses the last 14 “up days” and compares it to the last 14 “down days.” Another popular setting is 21-period.
  • The RSI indicator reads from 0 to 100, with levels added in between 0 & 100 to indicate overbought & oversold. Most traders use 70 to indicate the market is overbought and 30 to indicate oversold. Another popular combination for overbought & oversold is 80 and 20, respectively.

The RSI indicator on the EURUSD Daily Chart. The RSI has a 14-period setting, with 70/30 overbought/oversold levels.

Moving Average Convergence Divergence (MACD)

  • MACD is the difference between two moving averages converted into an oscillator through a series of calculations.The MACD consists of a “Signal Line” and a “Histogram.” The Signal Line is the difference between two moving average levels, creating a “MACD Line.” This line is then turned into another moving average line to smooth it out further, creating the “Signal Line.” The Histogram is the difference between the Signal Line and the MACD Line displayed as positive or negative bars.

The MACD on the daily EURUSD Daily Chart.

  • The standard MACD Settings are 12, 26 and 9.

The standard settings for the two moving averages in the MACD calculation are 12 EMA and 26 EMA. The difference between the 12 and 26 EMA creates the MACD Line. The MACD line is then smoothed out as a 9 EMA to create the Signal Line. Another popular setting is 5, 35, 5 and 5, 13, 1 because they are far more responsive than 12, 26, 9.

  • Most MACD divergence practitioners use the Histogram or the Signal Line for divergence.

Most traders consider the MACD Line an intermediate step in the calculation, i.e., the MACD Line is not an end result. I display without the MACD Line, i.e., only showing the Signal Line and Histogram.

Commodity Channel Index (CCI)

  • CCI is not only for commodities—traders can use it for any market.

A technical analyst, Donald Lambert, invented CCI in 1980 at the height of commodities speculation. However, CCI has grown in popularity since, and traders use them across multiple markets, including equities and Forex.

  • CCI is based on the idea that price tends to move in cycles, and reversals often follow extreme price levels.

The CCI measures the difference between the current price of an asset and its historical average price, adjusted for market volatility, to spot when the price may be at an extreme and about to turn.

  • The CCI indicator uses candles’ entire price ranges, high, low and close, in its calculation.

Other oscillators, such as RSI & MACD, only look at closing prices. This makes CCI much more comprehensive in its approach.

  • The CCI value can be positive or negative, with no minimum or maximum values.

In other words, the CCI indicator is “unbounded” (unlike RSI, which is bound between 0 and 100). Most traders place overbought or oversold lines to help interpret the CCI indicator. Let’s say on a chart that 70-80% of the time, the indicator’s value is between -100 and +100. Then +100 would make a good overbought level, and -100 would make a good oversold level.

CCI on the EURUSD Daily Chart.


  • The stochastic oscillator tries to find the extreme of a range before a turning point.

Developed in the 1950s by George Lane, it is one of the oldest oscillators in Technical Analysis.

  • The Stochastics formula looks for the highest price over a certain period and the lowest price over that same period, and compares those two values to the current price.
  • Because Stochastics looks at the highest & lowest prices over a certain period, regardless, it has an element of support & resistance.
  • The indicator’s value is bound between 0 and 100 with overbought and oversold levels.

Most traders place overbought and oversold levels at 80 and 20, respectively.

Stochastics on the EURUSD Daily Chart.

Price Rate of Change, or ROC.

  • The ROC indicator measures how much the price has changed as a percentage over a specified period.

Of all the divergence indicators, ROC is the simplest to understand. Let’s say the price of a stock has moved from $7 to $10, i.e., a change of $3. The ROC value is 3 divided by 7, i.e., 0.429, or 42.9%.

  • Shorter ROC settings are better for short-term moves. Longer settings are better for longer-term moves.

Let’s say I’m using a 10-period ROC on a Daily chart—the ROC indicator will compare today’s closing price to the closing price ten days ago. If, instead, I am interested in longer-term moves, I may change the ROC period from 10 to 50.

  • The indicator’s value is unbound.

The ROC value can be positive or negative, with no minimum or maximum values. If the ROC is at the zero line, the most recent closing price equals the closing price from the candle it compares to.

Price Rate Of Change on the EURUSD Daily Chart.

Pros & Cons of Divergence in Forex Trading


  1. Early Entry Signals: By identifying divergences between the price and the indicator, traders can anticipate market moves before they become evident on the price chart. This can help traders get into positions early, potentially capturing more significant price movements and improving reward/risk ratios.
  2. Risk Management: Divergence trading can be a valuable tool for managing risk. When traders identify divergence signals against the direction of their current trade, they can use that information to take profits or trail their stop-losses.
  3. Be a decision-making filter. Traders can build divergence signals into a strategy to help decision-making. This can bring an added layer of probability to help capture the trades most likely to go into profit.


  1. Lagging indicators: All oscillators are derived from past price data and are lagging indicators to some degree.
  2. Lack of Context: Indicators are blind mathematical formulae without market context. For example, a minor bullish divergent signal may not matter as much if the price is near a higher timeframe resistance level.
  3. Subjectivity in settings: All these indicators are dependent upon the settings. It’s easy, though, when testing indicators, to pick settings that work perfectly in the past but do not work in the future. This is known as “curve fitting.”
  4. Market conditions: Divergence signals may work better in certain market conditions than others. For example, many divergent indicators stop being as effective in tight ranges.

Top tips for trading divergence in Forex trading

  1. Use only one divergent indicator at a time. It’s tempting to stack indicators in the hope it will improve probabilities. But that leads to a lot of confusion, and trades don’t get to know the personality of an indicator, experiment with settings, and learn which market conditions suit it. Spend time specializing in a divergence indicator to know how best to use it.
  2. Don’t use divergence indicators blindly—take into account market context. Indicators are lagging and are not a magic bullet. Market context is the most important part of applying any Technical Analysis method. For example, is the market in a trend? In that case, find divergences in the smaller timeframe that help enter the market in the direction of the trend.
  3. Understand the math behind the formula of the indicator you use. This is essential in understanding what the indicator says about the price action and when the signal is meaningful or should be ignored because the market conditions aren’t suited. For example, I particularly like the Rate Of Change indicator because I fully understand what it’s telling me behind its formula.

What is the difference between divergence and confirmation?

When an indicator diverges, the price action and the indicator move in opposite directions. For example, there's divergence if the price action creates higher highs, but the indicator makes a lower high.

When an indicator confirms, the price action and the indicator are aligned. For example, there's confirmation if the price action creates a higher high and the indicator does the same.

Here, the ROC shows a divergence with the S&P 500 on the daily chart before it falls in value.

Types of Divergence in Forex

When it comes to divergence, there are two different main types.

Negative Divergence

“Negative divergence” (otherwise known as bearish divergence), is what the previous example in the USD/CHF pair demonstrated. This shows that momentum is falling, and perhaps a negative move is about to happen.

Positive Divergence

“Positive divergence” (also known as bullish divergence), is when momentum is picking up, but the price is weak at a low. This tends to suggest that the market is ready to make a turnaround and go bullish.

Examine the price chart below. It features the GBP/JPY pair and features positive divergence. The RSI sits down at the bottom and shows that momentum was starting to pick up before price did. In fact, we formed a little bit of a “double bottom” at the ¥127 level, but even as the price started to slump, the line on the RSI was rising. This was a hint, along with the double bottom, that we could continue to go much higher. As you can see, it triggered a major rally that eventually went all the way to the ¥148 level.

RSI Divergence

Hidden Divergence

There is also such a thing as “hidden divergence.” Typically, this is divergence between an oscillator and price action, but shows a likely continuation of the longer-term trend rather than a trend reversal. For example, if the market had been pulling back for a while and the oscillator started to show signs of bullish momentum, then it could show that the market was ready to continue the overall longer-term trend. This is essentially the same thing as “positive divergence” in what would have been a longer-term uptrend after a pullback. While it essentially means the same thing, it is important to note that sometimes people call this “hidden divergence” instead of positive divergence.

Check out the AUD/USD weekly price chart shown below. In the circled area and the part of the MACD that is highlighted by a rectangle, you should be able to see that several things are going on. For example, from a candlestick pattern perspective alone, we have formed a massive “W pattern”. This of course is very bullish. However, the market had pulled back quite significantly from a previous uptrend. Notice how the divergence on the oscillator showed itself by the histogram and the moving averages both have been rising while the price had pulled back for several candlesticks, roughly equivalent to two months. This was a sign that the longer-term uptrend was ready to continue. However, you could just as easily call this “positive divergence”, instead of “hidden divergence”, because essentially it is the same thing. Obviously, this can happen in both directions, but it must be along with the overall prevailing trend to qualify as hidden divergence.

Hidden Divergence

How Effective is Divergence in Forex?

Divergence is a common strategy and therefore it is relatively effective in the currency markets.

You need to be very cautious about taking a trade only based upon divergence. Like anything else in technical analysis, it tends to be much more effective on longer-term charts, and it most certainly needs to be backed up by other signs of confluence to take a trade.

Yes, it can work on its own but at the end of the day when you look at these examples, you can also see that there were other factors worth paying attention to at the same time, mainly a break of support or resistance.

It should also be noted that divergence is a very common tactic in stock trading, commodity trading, and other financial markets. It can be applied to any kind of underlying asset, so it is a type of trading that you can use regardless of where you are putting money to work.


Divergence is a useful tool to have when trading currencies, or any other markets for that matter. It is best thought of as a bit of a “early warning system” for beginning the process of entering a trade. Not only can you use it for a potential trade of a trend reversal, but if you are already part of a trend, it can give you a little bit of a heads up as to when you may need to either tighten your stop loss or take profit order. So, it can also be used to help you spot an optimal trade exit.

One of the more important aspects of divergence is that it is so widely used, many other traders will be paying attention to as well. Because of this, it is something that even if you choose not to trade this as a strategy, you should at least know divergence exists, because when it is obvious it can help move a market.


How do you detect Forex divergence?

The signs of divergence in Forex can be found with any type of oscillator, but the most popular ones to use are the RSI and the MACD. You can also use other oscillators, but these are by far the two most popular. It simply a matter of seeing when momentum is moving in the opposite direction of price. In that sense, any momentum-based oscillator can work, but you should probably avoid some of the more exotic oscillators, simply because you are hoping that other traders around the world are seeing the same type of set-ups you are.

How accurate is divergence trading?

It is just as accurate as anything else and is best combined with other confluent indications for a trade entry signal. The best thing about divergence is that it is not only accurate for a potential trend change, but it also gives you something to pay attention to for managing an existing trade. In other words, if you are seeing divergence on the chart that is working against your interests and your trade set up, it could give you a bit of an indication that you should start thinking about taking profit.

What is the best indicator to show divergence?

This is a very personal choice. I like the MACD, but the best thing you can do is find an oscillator indicator that you truly believe in. I have seen people use the Commodity Channel Index, as well as the Force Index. The choice is yours, but all these setups work in the same way.

Is divergence a good trading strategy?

Yes, divergence helps traders see price reversals or entry points that may not be immediately visible on the chart.

What are the two types of divergence?

Regular divergence signals a trend reversal, and hidden divergence signals a trend continuation.

What is normal divergence?

This is a regular divergence, which signals a trend reversal.

What is the success rate of divergence trading?

Divergence trading can help make more than half your trades winning trades if applied properly with price action.

Is divergence bullish or bearish?

Divergence trading can be both bullish and bearish depending on the direction of the signal.


Christopher Lewis
About Christopher Lewis

Christopher Lewis has been trading Forex for several years. He writes about Forex for many online publications, including his own site, aptly named The Trader Guy.


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