Divergence occurs when the price of an instrument moves in one direction while a technical indicator (typically RSI or MACD) moves in the opposite direction. Bullish divergence happens when price makes a lower low but the indicator makes a higher low — signaling weakening downward momentum. Bearish divergence is the reverse: price makes a higher high but the indicator makes a lower high. Divergence is a leading signal of potential trend reversal.
EUR/USD drops to 1.0850, then bounces, then drops again to 1.0820 (a lower low). But the RSI at the second low reads 35, higher than the 28 it read at the first low. This bullish divergence suggests selling pressure is fading, and a reversal upward may follow.
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