If we want to spot a bullish or bearish divergence in the MACD, we look at the green histogram and not at the blue and red lines. In the example below, the MACD shows a bearish divergence in the monthly chart. The same strategy can be applied to the Moving Average Convergence Divergence (MACD) indicator. In this case, the price climbed nearly 5 percent after the bullish divergence formed in the daily chart. In the bull case seen below, the RSI must form higher lows while the price is performing lower lows. In this example, EUR/USD lost 15 percent after the divergence formed over two years in the monthly chart. The bigger the timeframe, the bigger the price movement. If the price climbs higher while the RSI performs lower highs, it indicates that there will be a (massive) sell-off in the near future. In the chart above, the RSI shows a bearish divergence. If the RSI reaches oversold regions, it indicates that the recent drop will soon come to an end and there will be a wave towards the upside in the not-too-distant future. The opposite case holds true if the RSI falls below the line at the bottom.
If the RSI reaches above the line, the RSI signals us that the price is in overbought regions, indicating that there will be a sell-off soon enough. As you can see, there are two dotted lines, one at the top and one at the bottom. The Relative Strength Index (RSI) is shown as the purple wave above the price chart in the example below. In the most common way, bullish and bearish divergences are observed in the Relative Strength Index (RSI), the Moving Average Convergence Divergence (MACD) and the Money Flow Index (MFI). How it works and what you need to know about it isis explained in detailly in the following text.įirst of all, we have to specify where we want to apply this strategy.
While there are numerous strategies to use technical analysis as a useful tool to make profits, trading bullish and bearish divergences is said to be one of the most powerful approaches of them all. Trading bullish and bearish divergences is a popular strategy to take advantage of the price movements in the forex market.
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