How to use divergences

We witness a divergence every time that price moves in contradiction with the momentum shown in the indicator. An example is easy to spot: new price highs are not matched by new highs in the momentum indicator, and vice versa for new lows. This suggests that the price move is false and will most likely be reversed.

There are two types of divergences: bearish and bullish, and we will discuss them both and see some examples below.

Bearish divergence – price makes new highs, and momentum is falling or not making new highs. As a consequence, price is expected to shift lower, following the momentum.

MACD bearish divergence example:

Bullish divergence – price makes new lows, but momentum is rising or not making new lows. In such situations, a bullish evolution is expected.

MACD bullish divergence example:

Divergences can be spotted across all timeframes and on most currency pairs’ charts. Use pivot points, horizontal levels of support/resistance, Fibonacci etc. to establish entry points for your trade.