Divergence
A divergence is when the price of a currency pair moves in one direction and a technical indicator, usually an oscillator, moves in the opposite direction.
It can indicate that the market has lost momentum and a slowdown or reversal is on the horizon. The direction of the it generally indicates whether the momentum reversal of the price movement will be bullish or bearish, although the price reversal can occur immediately after the divergence or be delayed for an extended period.
False positives can also occur, where a price change does not follow a divergence. Therefore, it is always a good idea to confirm trends with multiple indicators and use proper risk control when entering a position based on divergence.
Vs Investment
While divergences can indicate an impending price reversal, they don’t always. Sometimes price action can slow down from an uptrend or downtrend to sideways momentum after a divergence.
Understanding the possible outcomes after a divergence can help you decide whether to close or open a position or place a specific order. For example, because sideways momentum can occur after a divergence, it may be preferable to place a stop loss on your long position or a limit order on your short position in case a price reversal does not occur.
Vs Confirmation
While divergence occurs when the price and the indicator show different information , confirmation describes when the price and the indicator show the same information. Confirmation can also describe when multiple indicators show the same momentum.
Knowing how to read it helps traders enter or exit positions when confirmation is not available. However, the price movement indicated by the divergence can be delayed or a false positive, so traders should always confirm the divergence with other tools.
Divergence Types
There are three types : Bullish (positive), Bearish (negative) and Hidden (Hidden). See the chart below to easily tell them apart, and read about each one in more depth below.
| Price Movement | Indicator movement | Divergence type |
| High -> High High | High -> High Reduced | Bearish |
| Bass -> Bass Reduced | Low -> Low Raised | Bullish |
| High -> High Reduced | High -> High High | Hidden Bearish |
| Low -> Low Raised | Bass -> Bass Reduced | Hidden Bullish |
The Principle of Convergence and Divergence: What is it and why is it important?
The principle of convergence and divergence focuses on the relationship between the price of an asset and a specific technical indicator, such as the Relative Strength Index (RSI) or the Moving Average Convergence and Divergence (MACD) indicator.
Convergence occurs when the price and the indicator move in the same direction, suggesting that the current trend is strong and likely to continue.
On the other hand, it occurs when the price and the indicator move in opposite directions, indicating a possible weakness in the trend and an imminent change.
Practical application of the principle of convergence and divergence :
- Identify entry and exit points: Convergence and divergence signals can help investors identify entry and exit opportunities in the market. For example, a bullish divergence could indicate that it is a good time to buy, while a bearish divergence could be a signal that it is time to sell or reduce positions.
- Trend Confirmation: The principle of convergence and divergence can be used to confirm the strength of a trend. If the price and the technical indicator are converging, this suggests that the trend is strong and likely to continue. If, on the other hand, a divergence is seen, this could indicate that the trend is losing steam and a change in direction could be near.
- Combination with other technical analysis tools: The principle of convergence and divergence becomes even more effective when combined with other technical analysis tools, such as trend lines, support and resistance, and candlestick patterns. By using these tools together, you will gain a more complete understanding of the direction of the market and improve your investment decisions.
The principle of convergence and divergence is a powerful tool in chart analysis that can help you identify changes in market trends and improve your investment decisions.
By learning to correctly identify and apply convergence and divergence on charts in combination with other technical analysis tools, you can increase your chances of success in the financial markets.
