what is divergence? Divergence is a phenomenon in which the price line moves in the opposite direction to the trend of technical indicators. This is a sign that the market is about to enter a trend reversal period. So in detail what is divergence? What types are included? Let’s learn more about Learn Forex Trading through the article below.
Overview of what is divergence?
Divergence is a phenomenon that occurs when price lines and the direction of technical indicators move in opposite directions.
What is the definition of Divergence?
what is divergence? Divergence is a condition that occurs when the direction of an asset’s price moves in contrast to the direction of the corresponding indicator. This is often assessed through a comparison between the bottom and top points on the price chart.
Divergence is often seen as an important signal. Shows changes in market trends and is often used by investors to spot potential trading opportunities.
Similar to what is Gap? it can also be used to determine market trends. If the gaps are mostly bullish, this could be a sign that the market is in an uptrend. Conversely, if the gaps are mostly bearish, this could be a sign that the market is in a downtrend.
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What are the common types of divergence?
There are many different types of what is divergence, below are some common types of divergence:
Regular divergence
Divergence often appears at high levels on price charts and indicators. Often able to predict stock reversal trends. There are two main types of divergence:
- Bullish Divergence: This appears when a stock is in a downtrend. When connecting the bottoms on the price chart, you see the price line decreasing. However, the technical indicator creates peaks and tends to increase. This signals a weakening of the downward momentum. Anticipate an impending reversal, indicating the possibility of the price moving from a downtrend to an uptrend.
- Bearish Divergence: Appears when a stock is in an uptrend. When connecting the peaks on the price chart, we see that the price line creates an uptrend. However, the technical indicator decreased when connecting the bottoms. This is a signal showing the weakness of the uptrend. Anticipate a reversal from bullish to bearish.
Hidden divergence
Hidden divergence is a popular tool used by investors to forecast the price trend of a stock. It is classified into two main types: bullish hidden divergence and bearish hidden divergence.
- Bullish hidden divergences often appear in the context of a stock’s upward trend. When the next bottom is higher than the previous bottom. However, the indicator shows a downward trend, which indicates a continuation of the price uptrend. Investors often recommend placing buy orders with a capital ratio of about 30-40% for that stock.
- Hidden bearish divergence appears in the context of a bearish trend and an upward trend in the indicator. This indicator suggests that prices still have “room” to fall. To minimize risks from general market price declines, investors often place orders to sell stocks.
What is divergence?
Oscillating indicators such as MACD, RSI, and Stochastic are often used to detect the appearance of Divergence in the market. Divergence can be positive or negative. Depends on the relationship between price and oscillators. Provides investors with an opportunity to identify discrepancies between price behavior and technical parameters, thereby supporting their trading decisions
Also similar to what is the non farm payroll?it is also an indicator that the market is preparing for a correction. If the index is falling while the stock market is rising, this could be a sign that the market is overbought and may be preparing for a correction.
Divergence RSI indicator
The RSI (Relative Strength Index) indicator is one of the popular tools used to detect Divergence. The RSI indicator is often used to measure the strength of a trend. And provides the overbought or oversold levels of an asset. There are two main types of divergences that the RSI indicator typically reflects:
- Bullish RSI (Bullish Divergence): This appears when the price creates a new bottom. At the same time, the RSI indicator did not create a corresponding new bottom. This could signal weakness in the downtrend. A reversal to an uptrend can be expected.
- Bearish RSI (Bearish Divergence): Appears when the price creates a new peak. At the same time, the RSI indicator did not create a corresponding new peak. This could signal a low potential for the uptrend. A reversal to a bearish trend can be expected.
MACD indicator in what is divergence?
The MACD (Moving Average Convergence Divergence) indicator is often used to detect what is divergence? in financial markets. There are two main types of divergences that MACD usually reflects:
- Bullish Divergence: Occurs when the price creates a new bottom. At the same time, the MACD line does not create a corresponding new bottom. It signals a weakening of the bearish momentum and can predict a reversal to the bullish trend.
- Bearish price MACD divergence (Bearish Divergence): This occurs when the price creates a new peak. At the same time, the MACD line does not create a corresponding new peak. It signals a weakening of bullish momentum and can predict a reversal to a bearish trend.
What is the Stochastic Divergence Indicator?
The Stochastic indicator is used to measure the overbought or oversold condition of an asset. Helps identify reversal points in price trends. Stochastic can also reflect inconsistency between price and the Stochastic indicator.
Here are two types of what is divergence. Regarding the Stochastic indicator:
- Stochastic Bullish Divergence (Bullish Divergence): This appears when the price creates a new bottom. At the same time, the Stochastic indicator does not create a corresponding new bottom. This could signal weakness in the downtrend. And a reversal to an uptrend can be predicted.
- Stochastic Bearish (Bearish Divergence): Appears when the price creates a new peak. At the same time, the Stochastic indicator does not create a corresponding new peak. This could signal weakness in the uptrend. And a reversal to a bearish trend can be predicted.
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Notes when using what is divergence?
When using Divergence in technical analysis. There are some important notes that investors need to consider to ensure the accuracy and effectiveness of trading decisions:
- It is always advisable to confirm divergence signals with support from other technical indicators and various market analysis tools.
- Sometimes, the appearance of divergence can be fake. Does not lead to a true reversal of the trend.
- Combine divergences with other technical indicators such as moving averages, Fibonacci retracements, or candlestick patterns for a more comprehensive view and better confirmation.
- A divergence that is accompanied by increased volume can be considered a stronger signal.
- Always consider divergences in the context of the overall market trend. If divergence appears against the general trend, it may not guarantee effectiveness.
- The appearance of Divergence can vary depending on the time scale of the chart.
- Apply careful risk management and set stop-loss levels to protect invested capital. When the market does not behave as predicted.
Conclude
what is divergence? (Divergence) helps predict price trend reversals and identify inconsistencies between prices and technical indicators. Can be flexibly applied in many different markets. However, it needs to be combined with other analysis methods to optimize accuracy. So, through the above article, we hope that Learn Forex Trading has provided readers with information and helped you understand more thoroughly what is divergence.
Frequently asked questions
what is divergence? considered a strong or weak signal in technical analysis?
Divergence is often considered a strong signal in technical analysis because it can provide forecasts of price trend reversals.
How to avoid fake divergences?
Avoiding fake divergences requires caution and confirmation from other indicators. Investors should ensure that the divergence signal is supported by various factors. Do not rely entirely on an indicator or chart.
Does Divergence apply to all market types?
Divergence can apply to many types of financial markets such as stocks, forex, commodities, and cryptocurrencies.