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Forex Trading Tips: Understanding Divergences

If you jumped in straight to the deep end, you'll by now understand how price action of various currencies pans out.

Trends are not in straight lines, even if their respective fundamentals are rock-solid.

Momentum matters in trading. From momentum—the pace of price change—users can pick out divergences.

Divergences print out when the price action of a currency and signals of the secondary indicator 'clash’.

Classic bullish divergence is formed when, for instance, the price of the EUR/USD pair is moving higher while the RSI is turning from the oversold territory.

Chartists can interpret this as a weakness in an uptrend, low demand, and a high likelihood of price correcting lower.

A bearish divergence pattern is the opposite.

In all, divergences are patterns visible in all time frames. 

Nonetheless, a word of caution: These patterns shouldn't be used in isolation. The best way to capitalize on divergences and generate quality long or short signals is to use it in combo with momentum indicators like the CCI, RSI, Stochastic, and even Bollinger Bands.

Keen to learn the forex market? Check out our other explainer articles in our Learn Forex blog. 

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