How to use divergences in Forex

25 April 2025

Forex trading is a complex matter. Traders try to use various strategies and professionals typically use more advanced methods which are more effective than beginner trading strategies. One such strategy is convergence and divergence in forex, which enables traders to detect important changes such as reversals and trend changes early and get a competitive edge. When indicators agree with price we call it convergence and when they disagree it is known as a divergence. While convergence confirms trend strength, divergence signals momentum changes and could indicate potential reversals and continuations. Divergence trading can greatly amplify a trader's accuracy and performance in identifying high-probability entry and exit points by comparing price high/lows against oscillator peaks and troughs. Let’s explain divergence trading in Forex and list popular indicators, assets, and strategies.

What does the use of divergences consist of?

There are two types of divergences in online financial trading: bearish divergence and bullish divergence. A bearish divergence is when price is showing an uptrend by showing higher highs, meaning recent price swings have higher prices than previous ones, but the indicator shows the opposite. The complete opposite is true when it comes to bullish divergence, indicating the bearish trend is possibly waning and it might soon reverse. Indicators used for spotting divergences include RSI, MACD, Stochastic, and more. We will explain the best indicators for your FX divergence day trading later. Let’s continue with the basics.

Divergence trading consists of several parts, including:

Identifying a divergence on an indicator
Classifying a divergence
Confirming signals using additional tools

To use divergence in trading first it is important to have any oscillator which can be effective in divergence trading. Most popular indicators for divergence trading provide an effective way to spot divergences early and capitalize on opportunities. Another aspect is to classify divergence as regular (trend reversal) or hidden (Trend continuations). Regular divergences occur when the price and momentum oscillators make opposite extremes. For example, when price forms higher highs on the chart but the oscillator forms lower highs. This indicates that the current trend might reverse soon as it is losing strength. Regular divergence if it happens during a bear market indicates a bullish reversal and the opposite is true when the current trend is bullish and we see a divergence. Hidden divergence, on the other hand, occurs when price and the oscillator form corresponding extremes in the same direction. For example, when price makes higher lows and the oscillator makes lower lows it signals that a pullback is ending and the trend will likely resume. For example, a hidden bearish divergence occurs when price makes lower highs but oscillators make higher highs, suggesting that the bearish trend might resume soon after a counter-trend pullback.

How are divergences used in trading?

Divergences are used as a powerful signal for highly accurate trading signals. Traders use them as a signal to try and find the best entries and exits. The most powerful advantage of divergences in FX and other markets is that they can give early signals for emerging price moves as they occur when oscillators disagree with price action. These patterns help traders to anticipate reversals or continuation depending on the signal before these events fully materialize on the chart. Divergences are also used to filter market noise and only focus on valid patterns.

Entry signals

When bullish divergence appears closer to the strong support zone, where price makes lower lows but the oscillator like RSI or MACD makes higher lows, traders usually wait for additional confirmation from other indicators or bullish candlestick patterns before entering a long position. For example, a MACD histogram reversing from negative to positive after a bullish divergence is often used as a long entry signal. A similar approach is implemented using RSI divergences. When price fails to confirm new lows coupled with RSI’s higher lows signals that selling pressure is weakening. Conversely, bearish divergences are when price makes higher highs but the oscillator makes lower highs, especially near key resistance levels traders anticipate short entries.

Exit strategies

Exits in divergence FX trading often occur when the next significant swing high or low happens, traders might look at Fibonacci retracement levels or pivot points for exits. When the oscillator returns to a neutral midpoint such as RSI crossing back its 50 level, traders can see it as a good exit signal. Some traders also employ trailing stops and place them just beyond new price swings which enables traders to lock in profits and make the trading position unlosable. Another popular method is employing fixed risk-reward rations such as 1:2, meaning traders target twice the pips of the stop loss. Both dynamic and fixed exit strategies have their advantages and disadvantages. Fixed risk-reward ratio trading is very beneficial for beginners while dynamic exit methods are more recommended for seasoned traders.

Types of divergences

As we have mentioned above, there are several types of divergences such as regular bullish, regular bearish, and hidden divergences. A regular bullish divergence happens when price forms lower lows but the oscillator (for example RSI, MACD) forms higher lows. This indicates that the downward pressure is waning and this pattern frequently appears at key support levels or trendline touches. This is a powerful signal for potential upside reversal and traders should become very alert when bullish divergence appears. Regular bullish divergences are especially effective when confirmed with other indicators or upside breakouts. Traders usually target the next resistance level or previous swing high to take profit targets.

The regular bearish divergence is characterized by price making higher highs while the oscillator indicator makes lower highs, signaling fading buying pressure. This pattern often is a powerful signal that downward movement might occur especially when it appears near resistance zones or chart pattern tops. Waiting for a bearish candlestick pattern or bearish breakout makes this setup even more effective. The profit target is typically at the next price swing or near the next support zone. Traders might also use engulfing candle patterns to confirm bearish divergence entries. Hidden divergences are slightly more difficult to spot. They signal trend continuation by showing price and oscillator matching extremes in opposite directions. Hidden bullish divergence happens when price makes higher lows while the oscillator makes lower lows. If you see this during a pullback from an existing trend, it signals that pullback might be over soon, giving powerful entry signals in the ongoing trend direction. Traders often combine this with support and resistance technical analysis to filter noise and catch large price movements, by policing stops below recent pullback and targeting either predetermined risk-reward ratio or following the price using trailing stops. The hidden bearish divergence happens when price prints lower highs and the oscillator shows higher highs. During corrective rallies, this setup indicates that buyers are probably losing power and it might be a good time to search for sell setups. As we can see, use of divergence can provide important insights about price movements and help traders target highly accurate setups.

How to know when a divergence in forex will occur

Let’s clarify one thing about Forex trading if you do not already know: No one has a crystal ball and no strategy will provide 100% win rate. Instead, experienced traders always think in terms of probabilities and try to find an edge, meaning they either have higher win rate and lower risk-reward or vice versa. If a trader finds good setups and has a 60% win rate with 1:2 risk-reward ratio, they will make more money than a trader who has a higher win rate but 1:1 risk-reward. Proper oscillator configuration and chart analysis are also critical to spot divergences reliably and ensure profitable long-term performance.

Popular indicators and configurations for spotting divergences

The most popular oscillators for divergence trading include RSI (Relative Strength Index), Stochastic oscillator, and MACD (Moving Average Convergence Divergence). Profitable

trading with divergences requires traders to select not only a proper oscillator but also the correct configuration or settings. The default settings can also be used by beginners not to complicate their trading further. Here are default settings for the indicators mentioned above:

RSI - 14 period
MACD - 12,26,9
Stochastic - 14,3,3

These settings ensure the responsiveness and noise reduction for the indicators are optimal across different timeframes.

If you are experienced you can tweak the settings of these indicators to increase or decrease their sensitivity depending on your trading style and strategy.

Best timeframes for divergence trading

There is no single best timeframe for divergence trading, as these setups are useful for almost any timeframe. However, lower timeframes such as 1-minute, 5-minute, 15-minute, and 30-minute will produce lots of noise and false signals, which is not beneficial for beginners. The 1-hour price chart usually offers a balance between the number of signals during trading day and their quality. Another method is to use several oscillators with different settings. One oscillator with lower settings and another with longer periods to ensure the trader also sees the big picture on higher timeframes.

Best assets for divergence trading

There are many assets offered by modern brokers and almost all of them usable for divergence trading. These setups are super powerful and all assets present divergence signals which makes this method very effective. In stock trading as well as currency trading, many experienced traders employ divergence setups to capitalize on market opportunities. Even crypto traders employ popular technical analysis methods, including divergence trading, and BTC is known to respond to support and resistance levels very positively. The best method is to select one asset class and stick to it to master divergence trading on that one asset.

Trading with divergences: Divergence trading strategy development

Knowing how divergence works and how traders use it is one thing but to actually deploy it in markets and make money requires additional steps from the trader. Traders must develop a structured and scientific approach combining precise objective rules, disciplined risk management, and confirming indicators to maximize the edge.

Divergence trading strategy rules

Here are basic rules for divergence trading. Depending on your preferences these rules can be tweaked.

Identify divergence type - Regular for reversal and hidden for continuation. Ensure to compare price action with oscillator readings to spot divergences accurately.
Additional confirmations - Use price action or other indicators and ensure they align with the divergence signal for maximum confidence.
Entry - When the oscillator shows divergence and your signal occurs it is trying to time your entries. Many traders use additional crossover or candlestick patterns for entries which is a good practice as divergence alone will not give accurate entries.
Stop-loss - One method is to place the stop-loss order just beyond the recent price swing, below for buy orders and above for short positions.
Take-profit versus trailing stops - Traders either target the next support and resistance zone or use dynamic trailing stop method, depending on their analysis and strategy rules.

Risk management

Although we mentioned stop-loss and take-profit above, we must expand on risk management as it is a cornerstone of financial trading and without strict risk rules it's impossible to stay in the game in the long run. Apart from stop-loss and take-profit orders, another critical part of risk management is position sizing. Position sizes that allow you to risk 1-2% of your total account balance on each trade (stop-loss) ensures you are not losing too much money even after several losing trades in a row. Coupled with a wise position sizing, traders also should familiarize themselves with trailing stops, which can be used to move stop-loss to near newer price swings ensuring to catch the maximum price move. Fixed stop-loss method has its own advantages as it makes it much easier to evaluate your strategy.

Integrating divergence trading strategy with other indicators

Reducing false signals is the number one job of traders and deploying other methods and indicators such as moving average crossovers can provide additional advantage. Some traders might also employ ADX indicators for filtering false signals. For example, a bullish divergence confirmed by a rising 50-period moving average (exponential, EMA) and ADX reading above 25 indicates a higher probability entry in a strong uptrend. When there is a choppy market and ADX is below 20 it is a good idea to avoid trading activities as many false signals are produced during these times.