When investigating more in detail the forex divergence system, it should be said that two situations may exist: upward reversal (bullish divergence) and downward reversal (bearish divergence).
Classic (Regular) Divergence in Forex trading
Classic (regular) divergence in forex trading is a situation where price action strikes higher highs or lower lows, without the oscillator doing the same. This is a major sign of the possibility that the trend is touching its end, and reversal should be expected. A forex divergence strategy is thus based on the identification of such probability of trend reversal and the subsequent analysis for revealing where and with which intensity such reversal may occur. In case of Immediate Edge Review this is important now.
Classic (regular) bearish (negative) divergence is a situation in which there is an upward trend with the simultaneous achievement of higher highs by price action, which remains unconfirmed by the oscillator. Overall, this situation illustrates the weak upward trend. In those circumstances, the oscillator may either strike lower highs, or reach double or triple tops (more often true for range-bound oscillators). In case of this situation, our divergence forex strategy should be to prepare for opening a short position, as there is a signal of possible downtrend.
Divergence in forex
Classical (regular) bullish (positive) divergence assumes that in the conditions of a downtrend, price action achieves lower lows, which is unconfirmed by the oscillator. In this case, we face a weak downward trend. The oscillator may either strike higher lows or achieve double or triple bottoms (which more often occurs in range-bound indicators such as RSI). In this case, our divergence forex system strategy should be to prepare for opening a long position, as there is a signal of possible uptrend.
In contrast to classic (regular) divergence, hidden divergence exists when the oscillator reaches a higher high or lower low, while price action does not do the same. In those circumstances, the market is too weak for the ultimate reversal, and therefore a short-term correction occurs, but thereafter, the prevailing market trend resumes, and thus trend continuation occurs. Hidden divergence in forex may be either bearish or bullish.