Article from Forex Trigger
Divergence can be identified from the oscillating signals, the most popular of which are the MACD, Stochastic and RSI. Any of these running on your day trading chart with costs in either candlesticks or bar chart form can be used.
Bearish Divergence
Bearish diverging exists when the price chart is seemingly bullish but the oscillator is showing a bearish trend.
In this situation a line across the highest highs of the price chart will be showing a upward trend. But a line drawn across the highest highs of the oscillating indicator will show a falling trend.
If you’re in this market going long, it is probably time to get out. If you have got a signal to open a trade to go long, the deviation is signalling you not to do it. If you have got a signal to open a trade to go short, on the other hand, the divergence is confirming that and you can go ahead.
Bullish Divergence
Bullish divergence is the other way round. It exists when the price movement on the day trading chart is seemingly downward, but the oscillator is showing a rising trend.
Here a line across the lowest lows of the price chart will show bearish (downward) movement, while a line across lowest lows of the oscillator will be moving upward.
The signal is the opposite to the previous one. The straying is signalling that the bearish trend is coming to an end so you can close short trades and open long trades if that fits with the other signals of your system.
Naturally no system is 100 pc correct and that applies to using divergence in trading just the same as anything more. Financial trading is risky and you can lose.
But looking for deflection as well as your ordinary system can be a very potent way to contribute to the successfulness of your system. Boost your profits by spotting patterns in deflection from the signals on your day trading chart.