Keys To Understand Divergence

A lot of traders are using DIVERGENCE trading strategy. So why divergence happen, how to sport them, when to look for divergence and indicator I use. That the story for today, lets dig deeper..

 

What is DIVERGENCE 

Divergence is another word for opposite. When your chart and the indicator don't tell the same story. Two party fighting essentially 

What Indicator to Use

Any indicator that is momentum based indicator will do the tricky. The two I use are RSI and MACD

MACD Eg. 

I will use a lot of eg. with RSI which I personally like coz no complication

Types of Divergence 

1. Regular Divergence 

2. Hidden Divergence

Regular Divergence 

Regular Divergence indicates the end of a trend and signals a trend reversal. In other words it indicates that if the price was trending downward for some time, it will soon start to trend up - and vice versa

Take a look at the image below:

And here's another example of a regular divergence but this time for a sell coming up. 

Hidden Divergence 

This happens during a trend and signals that the trend may continue after taking a bit of a pause. In other words it indicates that if the price was trending downward for some time and then paused for awhile, it may now continue in that same direction. 

Check out the image below:

And here's another example of a hidden divergence but this time for a sell.

So When to Look for Divergence 

A million dollar question🏦. This kind of moves occur near the end of the of the nice steady pullback. The sharp move will occur that can make indicator not to keep up with the move and that clearly indicate that the trend is more likely to resume its original trend. 

Take a Look

Just because there is a divergence in the market, it doesn't mean the price will turn. We have to use it in the right context, knowing that we are in a trend, we are pulling back into a key level, etc.

What causes Divergence (sharp moves down or up)

The first step to spotting divergence is understanding that divergence occurs when price moves so fast on the chart that the indicator can not keep up.

Remember, indicators always try to follow price as much as possible. So the key to finding divergence is to look for those sudden/sharp moves in the market that will cause the indicator to fall behind. 

See the image above :

TAKE HOME 

It's extremely important to use divergence in the right context.

Understanding when to use them and when not to, is one of the many keys to successful divergence trading

(Refer MyMentor🙂)

LogicFxTz... ✍️