Divergence

Whilst I do not use divergence as a major tool in my trading, I certainly find it helpfull to confirm or deny the existence of a trading possibility. On my charts you can see the THV Trix indicator which automatically plots divergence between price and the trix.

There are two types of divergence between price and and indicator.Classical or Regular Divergence and Hidden or Reverse Divergence.

The easiest indicator to use divergence with is the RSI with a common setting of 14. Basically, if price is making higher highs, but RSI is going lower you have bearish divergence, which suggests that price is not well supported and will fall. The reverse is true for bullish divergence.

Here is  a really good example of Bullish  Divergence on the hrly Aussie  chart..which I missed completely.....

Notice how price made lower lows , yet RSI went higher... certainly would have been a  much better exit to our short.

Here is a link that has pretty much everything covered - 

http://www.trading-naked.com/Divergence.htm