“technical Divergence And Convergence: Signals For Profit In The Australian Market” – In technical analysis, most indicators can provide three different types of trading signals: major signal line crossings, median line crossings, and indicator divergences. A divergence occurs when an indicator and an asset’s price are moving in opposite directions.
A negative divergence occurs when a security’s price is in an upward trend and a key indicator—such as the moving average convergence divergence (MACD), price rate of change (ROC), or relative strength index (RSI)—moves downward.
“technical Divergence And Convergence: Signals For Profit In The Australian Market”
Conversely, a positive divergence occurs when the price is in a downtrend but an indicator starts to rise. These are usually reliable signs of an asset price reversal.
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When using divergences to help make trading decisions, remember that indicator divergences can occur over extended periods of time, so tools such as trendlines and support and resistance levels should also be used to confirm reversals.
Understanding divergence, however, can be the most profitable trade, as it helps the trader identify and respond to price changes. This indicates that something is changing and the trader should consider his options, whether it is selling a covered call or tightening a stop. The problem comes when ego gets in the way of making a profitable trade—you need to take the right action based on what the price difference is actually doing, not what you think it might do in the future.
Deviations are either bullish or bearish and are classified by strength. A class A deviation is stronger than class B and class C deviation is the weakest of them all. Experienced traders tend to ignore Class B and Class C reversals as only a minor market indicator and only take action to protect profits during Class A reversal periods.
The security shown in the chart below is experiencing a prolonged uptrend; An observant trader will notice that ROC is falling in value as prices continue to rise.
Macd Indicator Interpretation
This type of negative divergence can be an early sign that the price of the underlying security is reversing. If the price of the security breaks below the upper trendline, this will complete the confirmation and the trader will take a short position. This article is devoted to terms such as divergence and convergence and their use in trading.
Divergence is the instance when the price chart diverges with the trading indicator used. It looks like this: in an upward movement the price chart makes a new high that is higher than the previous one while the indicator shows a high that is not higher than the previous one. This disparity could mean that the bulls are losing strength, leading to a downward correction or even a reversal in the next.
A classic divergence consists of two highs of the price chart and two corresponding highs of the trading indicator. One of the most popular indicators for catching divergence is MACD (Moving Average Convergence/Divergence).
If there is a strong uptrend in the market, the divergence may not limit itself to two highs. Before a downward correction or reversal, a triple divergence may form. This means the price chart shows three highs, each higher than the previous one, while the indicator shows three highs, each lower than the previous one.
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Convergence is when the price chart and the indicator chart converge. It looks like this: in a downward movement, the price chart shows a new low, which is lower than the previous one, while the indicator shows a lower high than the previous one. The indicator does not confirm the decline, which means that the bears have weakened, which may lead to further moves, upward corrections or reversals.
A classic convergence consists of two lows of the price chart and two corresponding lows of the indicator chart. This situation represents differentiation. The term “divergence” is more popular, so traders call convergence “bullish divergence”. For detecting convergence, MACD is also suitable.
Convergence also cannot limit itself to two lows if there is a steady downtrend in the market. Before a correction or reversal begins, a triple convergence may form: on the price chart, there will then be three descending lows, and on the indicator chart, three corresponding rising lows.
Macd Moving Average Convergence Divergence
Divergence or convergence on a chart is considered a useful trading signal. Many traders use fishing to open or close their positions.
If you are asking how to determine convergence and divergence, various indicators can be used, the most popular of which are MACD, RSI and Stochastic. Convergence/diversification can be traded on any highly liquid asset, H1 and higher time periods.
When a divergence appears, it gives a signal to sell: the quotes set a new local high but the indicator does not confirm it. However, very often divergence signals go against the current trend, giving good reason to close out profitable positions as a reversal is very possible.
In order to open new positions against the trend, one must be very careful here. Beginners should stay away from this. Divergence is better during corrections, to open new positions. If there is a correction in the downtrend and a divergence occurs during it, it is a good signal to sell. Positions should be open as per the current trend.
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After the convergence is formed, a signal to buy occurs: the price sets a new local low but the indicator does not. As a rule, convergence signals against the current trend, giving a good reason to stop selling because a reversal is highly probable. As with divergences, trading against the trend is a bad idea for beginners.
To open a buy position, a convergence in a downward correction is required. If there is a correction in the uptrend and a convergence is forming, this is a good signal to buy. The correction may be ending, so quotes will start to rise soon.
In this article we have explained the difference between divergence and convergence. Divergence vs Convergence refers to the process of diverging/converging price charts and trading indicators. These are good trading signals used for opening and closing positions.
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Divergence/convergence should be used along with other tools of technical analysis to make signals more efficient. Before trading for real, practice on a demo account.
Trading in financial markets since 2004. The knowledge and experience he has gained is his own approach to asset analysis, which he is happy to share with RoboForex webinar listeners.
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