Forexman

The divergence in the practice of technical analysis is almost the only means of reliable means of determining the entry point. But for many of the divergence is not a source of reliable signals. Someone does not take seriously this item, someone has found for itself a more effective instrument. Despite this I can confidently say: «Divergence works and works very well». To do this you need to know only the characteristic features of this reliable tool for analysis.

First, we need to understand what the general divergence. Divergence - a comparative characteristic of price and technical indicator. In other words, the divergence is the difference in the movements. It occurs at a time when the curves of prices and indicators that you are comparing, moving in different directions. As a rule, the divergence of signaling to us that in the near future, or now will change the trend or its continuation. Immediately it is worth understanding for myself, that divergence must be confirmed by the corresponding signals.

To determine the divergence is typically used MACD-Histogram. This is not the only element that can be used for the detection of the graphics area of divergence. For the same purposes may be equally effectively applied and RSI and CCI and Stochastics. As in the classical technical analysis, and here, the signal divergence on a larger time period would say that this signal is verified and reliable. And here you can plan your tactical moves, as at this time scale and at shorter. In the examples that we give below, we will compare the market price with two indicators: Stochastic and MACD. In its strategy, we use two exponential moving averages with periods of 50 and 200. EMA50 displayed as a blue curve, EMA200 - in the form of red. MACD set for periods 7-10-5. Stochastic - 9-3-3.

In order to delve deeper into the essence, we will mention about phenomena such as latent and correct the divergence.

Hidden divergence can be bullish and bearish.

Hidden bearish divergence

A sure sign of bearish divergence is the fact, when the price indicates a lower maximum, and the corresponding indicator - the higher maximum. This non-confirmation is often betrays itself during corrective rally when the market there is a downtrend. But one feature is taken into account. A similar phenomenon can occur when the price of re-tests the top. Signal, which is served hidden bearish divergence, said the weakness of the assets, which is analyzed.

Figure 1. Hidden bearish divergence

Hidden bullish divergence

Identify bullish divergence on the chart can be when the indicator makes a lower minimum, and the price at this time makes a higher minimum. Sometimes it can form and double bottom. Similar situations occur in the market during the correction of strong reductions in the phase of the growing trend. However, such situations can also occur when the price for the second time testing lows. With bullish divergence, we can conclude that the price will continue its upward movement and show us the entry point into the market.

Figure 2 Hidden bullish divergence

Correct divergence

This divergence is best used when the price of the previous tests the minimum or maximum. A similar phenomenon in the circles of traders called a double top (base). Often you can see on the market for several consecutive (3-4) higher price highs, at a time when the trend is up, and at the same time several consecutive (3-4) lower lows. This phenomenon is known as the 3rd or 4 th regular divergence. These signals are signals that the trend becomes weak in the near future is very likely to change, so it plans to build its trade in accordance with these changes. Some traders may perceive this situation as a signal to the correction stops (move closer), others at the same time may simply lock in profits.

But the main feature of the correct divergence lies in the fact that they are covered in conjunction with the divergences can give very strong signals, which can greatly increase the ratio of profitable and unprofitable trades in favor of the former.

Below is an example of correct divergence. Be sure to note certain characteristics of the analysis correct divergence. If we compare the two peaks in an uptrend or a downtrend compare the two minima, this does not mean that we should open position. In our opinion, one of the key advantages enjoyed by the correct divergence - this is an indication of whether the trend to continue movement in a given direction. That is, whether there is a strong impetus for further movement.

Figure 3 Correct divergence during the uptrend

Figure 3 shows the correct divergence during the uptrend. Technical feature of this divergence lies in the fact that in this case is compared to higher highs on price chart with the higher peaks on the chart indicators.

In turn right at the time of divergence of the downtrend assesses lower lows on the price chart with lower lows on the chart indicators.

Figure 4 Correct divergence during the downtrend

Note in Figure 4. Here we see that the chart price observed downtrend. But there are contradictions in the price chart and graphs indicators. When the current trend of forming lower lows, the Stochastic and MACD indicators form higher lows. This suggests that the current trend is weakening. Incidentally, this example (Figure 4) is also an example of the 3rd right divergence, as each higher low on MACD chart corresponds to each higher minimum on the price chart.

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