Divergence is one of the most effective and most common market conditions that provide reliable trading signals on the price reversal and market retracement depending on the divergence type. The concept is simple, and that’s why it’s loved by traders all around the world. Divergence is a market condition when the price and the indicator diverge or go in different directions. The signal of the upcoming price movement appears from this divergence. The indicator is usually an oscillator placed below the price chart, so you can easily see divergence without applying any additional tools
Regular Divergence
This is a regular bearish divergence. What you see is price moving up but the indicator is dropping down.
At some stage, what ever time frame this is at, there will be a correction where price will drop.
This is what traders look for to help confirm their TA.
As an example, a rising or ascending wedge usually is confirmed with a bearish divergence.
click on the image for a close up look
Real Example
Bitcoin for weeks had a rising price in a form of a ascending wedge. Meanwhile we had a descending MACD signal along with the histogram confirming a bearish divergence as well.
Regular Divergence
This is a regular bullish divergence. What you see is price moving down but the indicator is moving up.
At some stage, what ever time frame this is at, there will be a correction where price will rise.
This is what traders look for to confirm a long entry trade using a strategy such as descending wedge formations.
As an example, a descending wedge usually is confirmed with a bullish divergence.
click on the image for a close up look
Real Example
Bitcoin for weeks had a rising price in a form of a descending wedge. Meanwhile we had a ascending MACD signal along with the histograms confirming a bullish divergence in the making.
Note:
One of the main problems with divergence is that it can often signal a possible reversal but then no actual reversal happens, a false positive signal. So be careful as how you read divergences as they tend to play out eventually but you need more than just an indicator to know when, hence this is when formations become important as part of the strategy. False positives occur often when the assets price moves sideways like in a range or in a trend. You will note on many occasions, in a bull market, you will see many bearish divergences but they seem to not play out. Its true in the opposite direction, in a bear market, bullish divergences seem to get rolled over as well.