Trading Using Price Divergence
Price divergence, or divergence
" is a common concept in technical analysis. It refers to a contradiction, difference, or divergence between price movement on the chart and the technical indicator used. It is considered a reversal pattern, occurring after an uptrend to turn it into a downtrend, and after a downtrend to turn it into an uptrend.
These divergences typically happen when prices do not move in a conventional manner contrary to technical indicators, often during volatile market conditions or following significant news events.
The best indicators to use
are oscillators or momentum indicators, such as the Relative Strength Index (RSI), MACD, and Stochastic.
There are two main types of divergence:
1. *Regular Divergence*
2. *Hidden Divergence*
*Regular Divergence:*
1. *Positive Divergence (Regular Bullish Divergence):*
This occurs when the price moves downward to create lower lows while the technical indicator shows higher lows. This indicates weakness in the downtrend and a potential reversal to an uptrend, signaling a buying opportunity.
2. *Negative Divergence (Regular Bearish Divergence):*
This happens when the price moves upward to create higher highs while the indicator shows lower highs. This signals weakness in the uptrend and a possible reversal to a downtrend.
*Hidden Divergence:*
1. *Hidden Positive Divergence:*
This consists of higher lows in price action and lower lows in the indicator. When this appears, it suggests a buying opportunity.
2. *Hidden Negative Divergence:*
This consists of lower highs in price action and higher highs in the indicator. When this appears, it suggests a selling opportunity.
Price divergence indicates price movements that differ from conventional patterns and can be a sign of unexpected price behavior.
It can be used as part of a trading strategy to identify potential entry and exit points based on reversal or continuation signals.
Price divergence does not always imply a major trend reversal, but it can be an early signal of a change in direction.
Trading using price divergence relies on the trader's ability to read unexpected price patterns and act accordingly, requiring experience and ongoing analysis.
For courses on divergence through the educational academy, click here:
And here for the divergence course with supply and demand: [Course Link]
And here for a simple free strategy for trading using divergence: [Strategy Link]
