Using Divergence as a Trading Signal

Divergence can be a strong indication that the direction of a market is about to change.

Divergence is a popular trading signal for many indicators (including the Commodity Channel Index, the Relative Strength Index, and Momentum), and is therefore used as part of various different trading systems.

When a divergence is created by the price and an indicator, the trading signal is in the direction of the indicator. On the example chart, the CCI is diverging upwards, so the entry signal would be for a long trade. The result of the example divergence was a complete reversal of the EUR which moved 100 ticks in the direction of the divergence, the start of which can be seen on the example chart.

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