Divergence – What is It?
Divergence is the financial markets – be it forex, stocks or crypto – is basically when the market is doing something very different from what common analytical tools – i.e. popular oscillator-type indicators (Relative Strength Index, Stochastics, Williams %R) will suggest.
When the market is making a series of higher highs and higher lows, but the indicator you chose, for example, the RSI, is doing lower highs and lower lows, then divergence is happening.
What Does Divergence Mean for Traders?
Divergence is one of the most powerful INTERPRETATIONS of indicators that a trader must know and be able to recognise.
The reason for this is that divergence will often signal a very powerful correction – in forms of big retrace or reversal – is about to happen.
When is a Big Pullback or Price Reversal Most Likely to Happen Based on Divergence?
Have you ever experienced scenarios in your trading where you notice based on your indicators and maybe also third-party analysis – investing.com, fxstreet.com – that the market is very overbought or very oversold, and yet it keeps going and going?
Then, you may want to pay attention for signs of divergence to signal when that could happen.
Look at this picture.
In this example, we are looking at MACD divergence.
Look at how the price fell after that?
Video on Market Divergence and How To Trade It
This is a video I recorded (while I was taking a dump) so it may be echo-ey. Pardon the echos (and toilet humour), I just wanted to get it done before I lost the train of thought!
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P.S. This is my first post on divergence so I’m keeping it basic. Actually there’s more to be learnt in the above screenshot regarding MACD divergence. In the next post on this topic I will also be sharing with you what is “Hidden Divergence” and how that is different from “Regular Divergence”.