Divergence is when the price of an asset diverges (moves in the opposite direction) from the technical indicator that you are using on your chart.
Normally, if the price of an asset is going for higher highs, the technical indicator (especially an oscillator should follow it by also making higher highs and vice versa. If that doesn’t occur it means that the price and the indicator are diverging from each other.
The most commonly used indicators to identify a divergence are oscillators lie the Stochastic Indicator, the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Williams Percent R indicators.
An example is when the price of a currency pair moves to a lower low while the RSI moves to a higher low.
While it is easy to spot divergence, especially when using any of the above indicators, sometimes it could be confusing to identify what type of divergence is occurring. In forex, there are three main types of divergences: the regular (Classic) divergence, the hidden divergence, and the extended divergence.
What is classic divergence?
The regular divergence, which is also commonly referred to as a classic divergence, is a divergence that is easily spotted when using technical indicators. You don’t struggle to spot it.
The regular divergence signals a strong trend reversal. You can have a regular bullish divergence or a regular bearish divergence.
Regular bullish divergence ensues when the price of an asset is making lower lows while the oscillator is making higher lows. It signals a trend reversal and indicates that a recovery might follow.
A regular bearish divergence occurs when the price of an asset is making a higher high while the oscillator is making a lower high. It signals that the existing uptrend is losing momentum and that a retracement might follow.
![Bearish divergence]()
What does a divergence indicate?
Divergence occurs due to the lack of a clear directional trend.
When a divergence occurs, it shows that there could be an oncoming trend reversal or a continuation of a previous strong trend depending on the type of divergence that occurred. It is also clear that after the divergence, the oscillator resumes a mirrored bearish trend to the price movement.
What is a hidden divergence
Hidden divergence is the opposite of a classic divergence and it signals a continuation of a previous strong trend. You can have a hidden bullish divergence or a hidden bearish divergence.
![Hidden bearish]()
Figure 2. Hidden bearish divergence
![Hidden bullish]()
Figure 3. Hidden bullish divergence
We have discussed the two types of hidden divergence and how to trade them in the section below.
The hidden divergence is however at times confused with the extended divergence which occasionally occurs when the market is trading sideways (when the market is not trending). It is also clear that after the divergence, the oscillator resumes a mirrored bullish trend to the price movement.
The main difference between the regular and hidden divergence is that while the regular divergence signals a trend reversal, the hidden divergence signals a continuation of a trend.
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How to trade hidden bullish divergence?
As mentioned in the section above, the hidden divergence signals a potential trend continuation. Now let’s look at how to trade the bullish hidden divergence and the bearish hidden divergence.
Bullish hidden divergence occurs when the price of an asset is moving upwards and the price is making higher lows but the indicator is making lower lows.
It signals a continuation of an uptrend.
![bullish divergence]()
From the above chart, it is evident that the bullish trend continues after the slight downward movement during which the bullish hidden divergence occurred.
A hidden bearish divergence occurs during a downtrend when the price of an asset is making lower highs while the oscillator is making higher highs.
It signals a continuation of a downtrend.
![bearish divergence]()
From the above chart, it is evident that the bearish trend continues after the slight upward movement during which the bearish hidden divergence occurred.
Trading hidden divergence
When a hidden bullish divergence occurs, you should close any ‘sell’ orders you could have opened on that particular asset or currency pair and get ready to place a ‘buy’ once you confirm that the bullish trend has resumed.
When a hidden bearish divergence occurs, you should close any ‘buy’ orders you could have opened on that particular asset or currency pair and get ready to place a ‘sell’ once you confirm that the bearish trend has resumed.
Conclusion
Understanding the market trends in forex trading is sometimes a difficult task especially when it comes to determining whether a trend has come to an end or is poised to continue. However, with a good understanding of divergence, you should be able to easily determine whether to expect a trend reversal or trend continuation.
All that you need is a good understanding of the various types of divergences and how to identify them from a chart and this article provides you with all that you need to become a pro in identifying a divergence, differentiating the various divergences, and how to trade them.
Figure 2. Hidden bearish divergence
Figure 3. Hidden bullish divergence
