Trading Bearish Divergence in Forex

Many of us often hear the term 'Bearish' of 'Bullish' divergence. We hear this all the time regardless of if we are trading Forex, Stocks or commodities. This terms is simple it means. The process of an indicator “fighting” with the actual price action traders.

This can sometimes indicate a good time to take a trade as the market may be ready to shift direction.

Sometimes a technical indicator will disagree or “fight” with the actual price action of the Forex pair you are analyzing. These “disagreements” are useful for technical traders.

When we are long and looking for a short it's about higher highs and lower lows.  If you find them in price, but not in the oscillator, you have regular divergence.  If you find them in the oscillator, but not in price, then it's hidden divergence.

If the higher highs or lower lows are in price but not the oscillator, then the direction of price is likely to reverse.  This is regular, or classic divergence and can be used as a confirming indicator for a reversal entry.

Regular divergence describes a price trend change that will probably happen in the future, albeit shortly.  On the other hand, hidden divergence is a confirming indicator of past price direction.

We have hidden divergence when we have higher highs or lower lows in the oscillator but not in price.  In this case the direction indicated by higher highs or lower lows in the oscillator is contradicted by the price trend.  Unlike regular divergence, where the weakness in price trend is about to lead to a reversal; here the weakness has already led to a little reversal against the trend.  The hidden divergence implies that this recent  reversal in price direction will be short-lived and that price will resume moving in the direction of the trend.