Divergence is a term which often comes back in forex technical analysis, it occurs when the price of the underlying currency pair and the indicator move in opposite directions. A bullish divergence can predict future upturns, while a bearish divergence can predict future downturns. Currency traders make trading decisions by identifying situations of divergence, where the price of a currency pair and indicators, such as the MACD, are moving in opposite directions.
Bullish divergence occurs when the price of the underlying currency pair makes a new low while the indicator fails to make a new low or heading higher suggesting the downtrend may be nearly over. When identifying bullish divergences, a currency trader will look for BUYING opportunities.
Bearish divergence occurs when the price of the underlying currency pair makes a new high while the indicator fails to make a new high or heading lower suggesting the up trend may be nearly over. When identifying bearish divergences, a currency trader will look for SELLING opportunities.
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