Divergence in the market
What is divergence on ?
Divergence (from Latin divergere - to detect divergence) - one of the key indicators in the technical analysis of stock exchange trends, which shows the discrepancy between the direction of the price chart and the readings of the selected technical indicator.
As a rule, divergence is best seen on oscillator indicators - RSI, Stochastic, MACD, CCI, etc.
What does the divergence on the chart tell us?
The presence of a divergence on the chart indicates a possible price reversal. Often such a divergence is called bullish or bearish depending on where the price will go after the reversal: bullish divergence reflects growth, while bearish divergence reflects decline.
Types of divergence
In stock trading it is customary to distinguish several types of divergences:
Class Divergence "A"
Class A is considered to be the most significant, capable of producing the highest quality signals. It is usually an indicator of a pronounced reversal of the price trend.
- Class A: bearish divergence - the new maximum on the price chart is above the previous maximum, and the new maximum on the chart oscillator is below the previous high.
- Class A: bullish divergence - the new low on the price chart is below the previous low, and the new low on the oscillator chart is above the previous low.
Class Divergence "B"
Less significant signal that needs additional analysis (by another indicator).
- Class B: bearish divergence - The highs of the price chart are at the same level, forming a double top, while the second top of the oscillator chart is a level below its predecessor.
- Class B: bullish divergence - the minimum of the price chart at the same level (double bottom), the second minimum is higher than the previous one.
Class "C" divergence
The Class C divergence is more the result of a latecomer in a dynamic market than a signal. This signal is so weak and ambiguous that it is often ignored by traders.
- Class C: bearish divergence - the price chart shows a higher high than the previous one, the oscillator chart shows tops at the same level.
- Class C: bullish divergence - the price chart shows a lower low than the previous low, the oscillator chart shows a double bottom.
A special type of divergence is also known - triple divergence. This is the most rare and almost error-free signal. It consists of three fluctuations (either highs or lows of both the price chart and the oscillator). An interesting feature is that the initial divergence signal fails.
How do you define divergence?
As a rule, divergence is most often determined visually on the chart. For the convenience of traders, a number of technical divergence indicatorswhich greatly simplifies the detection of divergences and trading on them.
More about trading on divergences