A regular
divergence is used as a possible sign for a trend reversal.
If price
is making lower lows (LL), but the oscillator is making higher lows (HL), this
is considered to be regular bullish divergence.
This normally occurs at the end of a down trend. After
establishing a second bottom, if the oscillator fails to
make a new low, it is likely that the price will rise, as price and momentum
are normally expected to move in line with each other.
Below is
an image that portrays regular bullish divergence.
Now, if
the price is making a higher high (HH), but the oscillator is lower high (LH),
then you have regular bearish divergence.
This type
of divergence can be found in an uptrend. After price makes that second high,
if the oscillator makes a lower high, then you can probably expect price to
reverse and drop.
In the
image below, we see that price reverses after making the second top.
As you
can see from the images above, the regular divergence is best used when trying
to pick tops and bottoms. You are looking for an area where price will stop and
reverse.
The
oscillators signal to us that momentum is starting to shift and even though
price has made a higher high (or lower low), chances are that it won't be
sustained.
See the regular bearish divergence at work through this GBP/USD trade handpicked by Pipcrawler!
Did you get all of that? Pretty simple eh?
Now that
you've got a hold on regular divergence, it's time to move and learn about the
second type of divergence - hidden divergence.
Don't
worry, it's not super concealed like the Chamber of Secrets and it's not that
tough to spot. The reason it's called "hidden" is because it's hiding
inside the current trend.
We'll
explain more in the next section. Read on!
