What is Divergence?

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One of the main indicators in technical analysis on Forex is divergence. The ability to work with it is an important necessity in trading in the financial market.
Divergence – a signal of a discrepancy between the quote price and the technical indicator.

As you know, trading with currencies, it is important to correctly predict not only the volatility of prices in general, but also, more importantly, the end of the trend and the beginning of a new one. At such peak moments, a lot is being decided. Watching the oscillators on the charts, the trader builds his own trading strategy, trying to earn money at peak times.
But it happens that, for example, the price rises, while the oscillators, on the contrary, decrease, showing that the actions of buyers or sellers have become less. That is, a price reversal is likely. Such moments are called “divergence”.
The most popular charts for observing divergence using oscillators are MACD, RSI, RVI, Stochastic and Momentum. In essence, divergence is a reaction to the volatile mood of those involved in trade. But there are times when inertia also causes divergence after strong changes in the market. In its most classic form, divergence is the moment when the price updates its upper highs, and oscillators, on the contrary, update the lower highs. Divergence itself is a phenomenon that does not occur so often, but it is of great benefit to bidders with due dexterity. After all, having noticed divergence, the trader will be at the very origins of a new trend, which may promise good profit in the future. For the convenience of using different types of divergence, special indicators of divergence have been developed that are actively used for earnings.

There are several types of divergence that can be distinguished, each of which has several variations, depending on the position of the price, with subclasses that already depend on the strength of the signals. Lets take a look at them.

• Classical (Explicit) Divergence
The most significant and simplest form of divergence. Indicates the upcoming price reversal and the beginning of a new trend. It has two variations:
1. Bearish divergence – a new peak of the price is above the previous peak, and the oscillator is below its previous maximum. The signal of this variation can be used to open a short position.

2. Bullish divergence – the peak of the new price is lower than the previous maximum, the indicator, on the contrary, is at the new maximum. This signal serves as a recommendation to open a long position.

• Hidden divergence
Latent divergence, in fact, is the opposite of explicit divergence in relation to price volatility and indicator. It speaks more about the continuation of the trend than about its reversal. Most often, latent divergence is inside the trend. It also has two main variations:
1. Hidden bearish divergence – the price updates the lower maximum, the oscillator, on the contrary, is up. This situation is a good reason to open a sell position.

2. Hidden bullish divergence – the price continues to rise, while indicators are falling. It’s time to open a buy position.

• Extended divergence
The rarest form of divergence, when the indicators reach peaks (maximum or minimum) far from each other, at the same time as price peaks are at approximately at the same level, that is, the price rises / falls slightly. On the graph, this is expressed in the appearance of the so-called “double mountain effect” (at maximum) or “double bottom effect” (at minimum).

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Divergence In Stochastic, What is Divergence?.

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As a market moves up towards a resistance, stochastic lines should usually point up. He or she has a long term time horizon like a couple of months to even a couple of years. No one can anticipate where the marketplace will go.

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Usage another indication to confirm your conclusions. If the resistance and the supportlines are touching, then, there is likely to have a breakout. And if this is the Stochastic Trading circumstance, you will not have the ability to presume that the cost will turn again. So, you might just want to set your orders beyond the stretch ofthe support and the resistance lines in order for you to catch a happening breakout. Nevertheless, you must use another indicator so you can validate your conclusions.

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