How to trading Divergences
Surely you’ve ever met our concepts of divergence in our analyzes. Some of you may know what is going on, others do not know. Just for those of you who have not met one of the most powerful technical indicators yet, is this post.
First, we should explain the very notion of divergence. Divergence means a term denoting deviation, deflection, mutual distancing, development that leads to delay, startup. In the world of trading, divergence means a contradictory development between the price and the indicator, most often the oscillator. You may wonder why divergence is so important and why you should analyze it. Because, first of all, it is a very good signal for market entry and very often determines the end of the trend.
Oscillators are most commonly used to determine divergences.
The most popular and usefull oscillators are:
Negative Volume Index
Rate of Change
Slow Stochastic Oscillator
Smoothed Rate of Change (SROC)
Twiggs Momentum Oscillator
Vertical Horizontal Filter (VHF)
You can not tell which of these oscillators will best serve you. Each oscillator moves on the basis of another calculation and has the chance to capture divergence when another indicator does not show anything. For starters, however, we can recommend Stochastic with the 14,3,3 setting.
Generally, we distinguish two kinds of basic and hidden divergences that are then divided into BULLS and BEARS. In the theory of technical analysis we know four kinds of divergences:
At first glance, there is a difference in price and oscillator movements. We see that bulls divergence is formed in a decreasing trend and arises in such a way that the market creates lower low while the oscillator at the same time creates a higher low. The oscillator seems to start a new trend before it appears in the market. The opposite is the bearish divergence, which is created in the rising trend, while the oscillator already starts to fall.