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Forex Divergences

Posted in Analysis by Lewis Wolfe
Tuesday, November 4th, 2008 15:29 PM GMT

The particular divergence of interest to forex traders is when a pair price and its associated indicator(s) start going in opposite directions. Commonly, indicators such as RSI or MACD are the likely candidates.

There is a classification of divergence into positive or negative,

Positive divergence = indicator moves higher as price declines.
Negative divergence = indicator moves lower as price increases.

But do note that with the forex market and currency pairs, this is a slightly artificial distinction, as compared with commodities, stocks etc. (because you could just turn the chart upside down).

forex-divergence.gifIt is held that divergences increase the strength of a signal. A positive divergence, ie. price declining, with RSI below 30 would increase the robustness of a signal based on a move back above 30 – as (perhaps) indicated in the chart, right.

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