Divergence is a commonly used technical analysis tool in Forex trading that helps traders to identify potential trend reversals. Divergence occurs when the price of an asset and a technical indicator (such as the Relative Strength Index or Moving Average Convergence Divergence) move in opposite directions. This can be a signal of a potential change in trend direction.
There are two types of divergence: bullish divergence and bearish divergence. Bullish divergence occurs when the price of an asset makes a lower low, but the corresponding indicator makes a higher low. This can indicate that the momentum of the downtrend is weakening and a potential trend reversal to the upside may occur. Bearish divergence occurs when the price of an asset makes a higher high, but the corresponding indicator makes a lower high. This can indicate that the momentum of the uptrend is weakening and a potential trend reversal to the downside may occur.
Divergence can be a useful tool for traders to confirm potential trend reversals and to identify entry and exit points for trades. However, it should not be relied upon as the sole basis for trading decisions. Traders should use divergence in conjunction with other technical indicators and fundamental analysis to make informed trading decisions and manage risk appropriately.
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