Divergence
Candlefocus EditorDivergence can be classified into two main types: regular divergence and hidden divergence. Regular divergence occurs when the price and an oscillator indicator fail to show a similar pattern. The regular divergence is either positive divergence or negative divergence. Positive divergence occurs when the price is making lower lows and the oscillator is making higher lows. Negative divergence occurs when the price is making higher highs and the oscillator is making lower highs.
Hidden divergence is the opposite of regular divergence and can be used as confirmation of trend direction. It occurs when the price and an oscillator both show a similar pattern, but the oscillator fails to indicate the same highs or lows that the price has made. Hidden divergence is either bullish when the price is making lower lows and the oscillator is making higher lows or bearish when the price is making higher highs and the oscillator is making lower highs.
Divergence trading can be an effective way to identify potential turnarounds or trending movements in the price of an asset. Knowing how to identify and assess both regular and hidden divergence can give traders additional insight into the trend, strengthening their analysis of the market’s direction and providing more reliable trading signals.
In conclusion, divergence is a powerful trading tool and should be added to any technical trader’s toolbox. When used correctly, divergence can provide an insight into the strength of a trend, identify potential reversals and add reliability to a traders analysis of the market.