A Divergence between price movement and indicator strength usually signals the possibility of a weakening trend.

While by no means is it a fail-safe signal, when used properly and combined with other entry parameters, it can create trades with potentially large profits. In this case, the divergence between price and Moving Average Oscillator signaled the potential for a short, quick intra-day trade of about 87 pips on the GBPUSD.

Divergence Signaling A Weakening 15min Up-Trend

The chart shows the GBPUSD on the 15 min moving upwards, and the divergence indicates that the strength of the uptrend had started to weaken. This created the conditions for a possible trade to the downside if the GBPUSD did trigger for a short entry.

However, it’s wise to note that indicators indicate. While the potential for a Sell Trade existed, it would have been premature to sell until you actually have a trade set-up for the entry.

So while you may want to incorporate convergence/divergence signals into your technical analysis, remember that you’ll be trading against the trend. So you do want more than just the technical signal as a criteria for entering the trade.