The essence of divergence is very simple: The divergence of price and indicator movements.
When price updates higher highs and the oscillator updates lower highs, it is divergence in its classic form. It could be stochastic, RSI, MACD, CCI and hundreds of other oscillators. Some traders believe divergence is the only oscillatory signal worth looking at.
From stochastics creator George Lane to Alexander Elder, hundreds of professional traders have described divergence in their books.
What is the essence of the divergence?
When the price reaches its maximum value, the oscillator should reach it too. The same is true for the minimum values. This is how it works in a normal situation. If the oscillator and price decide to mark different values - we're talking about divergence.
It can be used in two main cases:
conventional divergence;
hidden divergence.
Let us now analyze them.
The classic divergence
The simplest and clearest signal, which hints at a future trend reversal. If price makes a lower low and the oscillator makes a higher low, we have a traditional bullish divergence. In other words, if the oscillator is up and the price is down, that is a hint of a reversal of the price in the direction of the oscillator.
The opposite situation is also true. The trend is going upward and the price is updating the maximums and if the oscillator is not then it’s a divergence.
The optimal use of divergence is on the maximum and minimum values of the price. This is the easiest way to find the reversal zone. The oscillator directly indicates that the momentum is changing and although the price keeps updating levels, it will not last.
We have considered the conventional divergence, now let's look at its evil cousin, the hidden divergence. It is not so secret that it is just a divergence hidden within the trend.
Hidden divergence
A divergence does not always indicate a trend reversal. Sometimes it is, on the contrary, a clear indication that the trend will continue. Remember, you should be friends with the trend, so any signal that the trend will continue is a good signal.
Hidden divergence is quite simple. The price updates the upper low and the oscillator updates the lower low. It is easy to see. When the price has updated the maximum, check if the oscillator has done the same. If it doesn't and goes in the opposite direction, it's a divergence.
And there is the hidden bearish divergence. The price updates lower highs on a downward move and the oscillator, on the other hand, it is trending upwards and updating the higher highs. If the general trend is downward, it is an indication that this trend will continue and quite possibly double its efforts.
How Use Divergences Properly?
Divergences are a great tool. However, it often raises the question of when exactly to open the trade so that it does not happen that the trade is opened too early or too late. For this purpose, we need a confirmation: some method allowing us to filter the false entries in the divergence. We will consider several such methods.
Oscillator crossing
The first thing we usually look at is a trivial crossing of oscillator lines, say, stochastics. This is an additional indication that the trend may soon change. Therefore, when the price approaches the upper or lower zone, the crossing can give a good signal.
Patience and confirmation of signals are the main qualities of a trader. Divergence is a great tool, but you need to confirm it with additional tools to achieve really good results.
Oscillator exits the overbought/oversold zone
Well, we took our time and waited for additional confirmations of the divergence. Strong enough to indicate a reversal of the trend. Which ones? Remember the basics of technical analysis. A trend line would show that the trend is steadily descending and it is too early to enter the reversal.
This technique is very valuable for finding a reversal or breakdown of a trend line. If the price bounces from the trend line, draw it for the oscillator as well.
8 rules of divergence
To use divergence successfully, it is advisable to adhere to the following rules.
1. The minima and the maxima
The following conditions are necessary for divergence
price updates higher highs or lower lows;
a double top;
double bottom.
When the price updates these highs and lows, there is a trend and this is the feeding ground for divergence. If there is no trend and all you see is a consolidation, the divergence can be missed.
2. Draw lines between the tops
The price is in only two states: trend or consolidation. Connect its tops with lines in order to figure out what is going on. If one peak is lower or higher than the other, it is trending and the market is sweet and available for trades. If there are no clear new highs and lows, it means that there is a consolidation, and divergences do not play a significant role in it.
3. Connecting the tops
Let's be more specific. The price reached the new maximums? Connect the tops. If it made lower lows, connect them. And don't get confused. A very common mistake the price makes new highs and the trader connects the previous lows for some reason.
4. Just watch out for overbought and oversold.
We have connected the tops with trend lines. Now we study the oscillator readings. Remember we are only comparing highs and lows. It doesn't matter what the MACD or stochastic is showing in the middle of the chart. What difference does it make? It makes no difference. We are only interested in their boundary values.
5. Connect the highs and lows of both the price and the oscillator
If we have connected the highs/minimums of the price, we have to do the same for the oscillator. And not somewhere, but for the current values.
6. Watch the angle of slope of the lines.
Divergence when the angle of lines for the price and the oscillator is different. The more this difference, the better. The line can be upward, downward or flat.
7. Don't miss the moment
If you notice the divergence too late and the price reverses, it means the train has already left. The divergence has worked out, it will not be relevant forever. The one who missed it is too late. Wait for the next price divergence with the oscillator and a new divergence will not keep you waiting.
8. Longer timeframes
Divergence works better on higher timeframes. Simply because there are fewer false signals. That's why it's recommended to use them on 1-hour charts or more. Yes, some people like 5- and 15-minute charts, but in these timeframes, divergences often lead to false ones.
These are the rules for dealing with divergence. It's a cool tool. If you specialize on it, it is one of the most powerful methods of technical analysis. Certainly, you will need practice and a bottle of good wine to understand all its peculiarities.
When price updates higher highs and the oscillator updates lower highs, it is divergence in its classic form. It could be stochastic, RSI, MACD, CCI and hundreds of other oscillators. Some traders believe divergence is the only oscillatory signal worth looking at.
From stochastics creator George Lane to Alexander Elder, hundreds of professional traders have described divergence in their books.
What is the essence of the divergence?
When the price reaches its maximum value, the oscillator should reach it too. The same is true for the minimum values. This is how it works in a normal situation. If the oscillator and price decide to mark different values - we're talking about divergence.
It can be used in two main cases:
conventional divergence;
hidden divergence.
Let us now analyze them.
The classic divergence
The simplest and clearest signal, which hints at a future trend reversal. If price makes a lower low and the oscillator makes a higher low, we have a traditional bullish divergence. In other words, if the oscillator is up and the price is down, that is a hint of a reversal of the price in the direction of the oscillator.
The opposite situation is also true. The trend is going upward and the price is updating the maximums and if the oscillator is not then it’s a divergence.
The optimal use of divergence is on the maximum and minimum values of the price. This is the easiest way to find the reversal zone. The oscillator directly indicates that the momentum is changing and although the price keeps updating levels, it will not last.
We have considered the conventional divergence, now let's look at its evil cousin, the hidden divergence. It is not so secret that it is just a divergence hidden within the trend.
Hidden divergence
A divergence does not always indicate a trend reversal. Sometimes it is, on the contrary, a clear indication that the trend will continue. Remember, you should be friends with the trend, so any signal that the trend will continue is a good signal.
Hidden divergence is quite simple. The price updates the upper low and the oscillator updates the lower low. It is easy to see. When the price has updated the maximum, check if the oscillator has done the same. If it doesn't and goes in the opposite direction, it's a divergence.
And there is the hidden bearish divergence. The price updates lower highs on a downward move and the oscillator, on the other hand, it is trending upwards and updating the higher highs. If the general trend is downward, it is an indication that this trend will continue and quite possibly double its efforts.
How Use Divergences Properly?
Divergences are a great tool. However, it often raises the question of when exactly to open the trade so that it does not happen that the trade is opened too early or too late. For this purpose, we need a confirmation: some method allowing us to filter the false entries in the divergence. We will consider several such methods.
Oscillator crossing
The first thing we usually look at is a trivial crossing of oscillator lines, say, stochastics. This is an additional indication that the trend may soon change. Therefore, when the price approaches the upper or lower zone, the crossing can give a good signal.
Patience and confirmation of signals are the main qualities of a trader. Divergence is a great tool, but you need to confirm it with additional tools to achieve really good results.
Oscillator exits the overbought/oversold zone
Well, we took our time and waited for additional confirmations of the divergence. Strong enough to indicate a reversal of the trend. Which ones? Remember the basics of technical analysis. A trend line would show that the trend is steadily descending and it is too early to enter the reversal.
This technique is very valuable for finding a reversal or breakdown of a trend line. If the price bounces from the trend line, draw it for the oscillator as well.
8 rules of divergence
To use divergence successfully, it is advisable to adhere to the following rules.
1. The minima and the maxima
The following conditions are necessary for divergence
price updates higher highs or lower lows;
a double top;
double bottom.
When the price updates these highs and lows, there is a trend and this is the feeding ground for divergence. If there is no trend and all you see is a consolidation, the divergence can be missed.
2. Draw lines between the tops
The price is in only two states: trend or consolidation. Connect its tops with lines in order to figure out what is going on. If one peak is lower or higher than the other, it is trending and the market is sweet and available for trades. If there are no clear new highs and lows, it means that there is a consolidation, and divergences do not play a significant role in it.
3. Connecting the tops
Let's be more specific. The price reached the new maximums? Connect the tops. If it made lower lows, connect them. And don't get confused. A very common mistake the price makes new highs and the trader connects the previous lows for some reason.
4. Just watch out for overbought and oversold.
We have connected the tops with trend lines. Now we study the oscillator readings. Remember we are only comparing highs and lows. It doesn't matter what the MACD or stochastic is showing in the middle of the chart. What difference does it make? It makes no difference. We are only interested in their boundary values.
5. Connect the highs and lows of both the price and the oscillator
If we have connected the highs/minimums of the price, we have to do the same for the oscillator. And not somewhere, but for the current values.
6. Watch the angle of slope of the lines.
Divergence when the angle of lines for the price and the oscillator is different. The more this difference, the better. The line can be upward, downward or flat.
7. Don't miss the moment
If you notice the divergence too late and the price reverses, it means the train has already left. The divergence has worked out, it will not be relevant forever. The one who missed it is too late. Wait for the next price divergence with the oscillator and a new divergence will not keep you waiting.
8. Longer timeframes
Divergence works better on higher timeframes. Simply because there are fewer false signals. That's why it's recommended to use them on 1-hour charts or more. Yes, some people like 5- and 15-minute charts, but in these timeframes, divergences often lead to false ones.
These are the rules for dealing with divergence. It's a cool tool. If you specialize on it, it is one of the most powerful methods of technical analysis. Certainly, you will need practice and a bottle of good wine to understand all its peculiarities.
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bit.ly/3spSQqC
🔻FREE Telegram channel🔻
t.me/DeGRAMChannel
🔻Contact for Paid SIGNALS🔻
t.me/DeGRAMForex