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Divergence

Divergence occurs when an asset's price moves in the opposite direction from other data or from a technical signal, such an oscillator. Divergence signals that the price trend may be waning and, in extreme situations, may even result in a price reversal. Divergence can be both beneficial and bad. Positive divergence suggests that the asset's price may rise in the future. A move lower in the asset is indicated by negative divergence.




Understanding Divergence
Divergence happens when the price of an asset moves in the opposite direction of a technical indicator or other data. It suggests that the current trend in price might be weakening and could change direction.

There are two types of divergence: positive and negative. Positive divergence suggests that the price might go up, while negative divergence suggests the price might go down.

Positive divergence occurs when the price is falling but a technical indicator is rising or showing bullish signals. On the other hand, negative divergence happens when the price is rising but a technical indicator is falling or showing bearish signals.

It's important to note that divergence alone is not a reliable signal for trading decisions, as it may not always lead to a price reversal.

What Does Divergence Tell You?
Divergence can indicate a significant price move, either positive or negative. Positive divergence occurs when the price makes a new low while an indicator starts to climb, suggesting a potential upward movement in price. Conversely, negative divergence occurs when the price makes a new high but the indicator makes a lower high, indicating a possible downward trend.

Traders use divergence to gauge the momentum behind price movements and to assess the likelihood of a trend reversal. For example, if a stock is rising but the Relative Strength Index (RSI) is showing lower highs, this could signal weakening upward momentum and a potential price decline.

Positive divergence, where the price is making new lows while the RSI shows higher lows, might indicate that downward momentum is fading and a trend reversal could be imminent. Divergence is commonly used with oscillators like the Relative Strength Index (RSI).

The Difference Between Divergence and Confirmation
Divergence occurs when the price and indicator are giving conflicting signals, while confirmation happens when they are aligned. Traders typically prefer confirmation before making trading decisions or while managing trades.

Limitations of Using Divergence
Divergence should not be relied upon as the sole indicator for trading decisions. It may not be present in all price reversals, and other analysis techniques should be used alongside it. Additionally, divergence does not guarantee an immediate price reversal, and traders should exercise caution and consider other factors before acting on divergence signals.

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