Divergences in technical analysis

Divergence is one of the most important concepts in technical analysis that many technical analysts may be less familiar with. Types of divergence in technical analysis are directly related to the use of indicators in technical analysis. In fact, divergences are formed by tzzzzhe contradictory behavior of price charts and indicators. Therefore, if you are not already familiar with the indicators, leave the continuation of this article here and first read what the indicator article is and what it is used for in technical analysis.

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In this article, we intend to discuss the concept of divergence in technical analysis and express the types of divergence . Stay with us.

What is divergence?

Divergence in technical analysis is actually a term used when a indicator and price chart contradictory behavior occurs . Look at the picture below.

Divergences in technical analysis

In the figure above, at the top of the image you can see the price chart and at the bottom of the image you can see the corresponding RSI indicator curve. As we have shown in the picture, in a part of the price chart , we see two floors or valleys in the price (point A and point B) where the second valley (point B) is lower than the first valley (point A). But the corresponding points in the indicator chart are so contradictory that point B is higher than point A. This paradoxical behavior is called the divergence indicator and price chart, which may occur in different indicators.

Application of divergence in technical analysis

The application of divergence is in determining the points where there is a possibility of a reversal of the trend. The analyst is looking for divergences in order to find levels where the price trend may change. Before fully expressing the application of divergence in technical analysis, it is necessary to be familiar with the concept of process.

Trends

The price of a stock (or asset) always fluctuates. Trends consist of price fluctuations. It is the general direction of these fluctuations that determines the price trend. The general movement of ups and downs, up or down or moving in a neutral direction (without a specific direction), is called the price trend direction, which are divided into three categories:

Uptrend
downward trend
Neutral trend

In the pictures below, you can see the types of price trends.

Drawn lines are known as trend lines. In the ascending trend the trend lines are drawn from connecting the valleys and in the descending trend the trend lines are drawn from connecting the peaks.

Using divergences in identifying trend reversals

By observing the divergences in an ascending or descending trend, one can understand the turning points of the trend. Note that divergence is not a cause of trend change, but a sign of trend change . It is very important to pay attention to this point. Seeing divergence is just a warning, not a reason to buy or sell. Divergence is a sign of a return to the trend, but nothing is certain. Many novice analysts use divergence as a reason to buy or sell, which is completely wrong. You will receive a warning when you see a divergence, and you will have to consider other things to decide on the deal. In the following, we will deal with the types of divergences, and during that, we will discuss how to use divergences in the transaction.

Types of divergence in technical analysis

In general, there are four types of divergence , each of which is discussed separately below.

1- Normal positive divergence (RD +)

Regular positive divergence or Positive Regular Divergence is a divergence in the downtrends T is formed in two consecutive floors. In this way, the price of a floor is lower, but the indicator fails to do so. Look at the picture below.

Normally positive divergence

When a typical positive divergence is observed, the downtrend is probably over and the uptrend will begin. The technical analyst can see the divergence of positive normal (for convenience called it positive divergence) and taking into account other evidence, to buy it. Other evidence can be various issues such as where the divergence occurred, the indicator that showed the divergence, the number of indicators that confirm this divergence, and so on.

Where divergence occurs : Positive divergence has a very high validity if it occurs in saturated sales areas or support levels.

2- Normal negative divergence (RD-)

A typical negative divergence is seen at the end of an uptrend and occurs between two ceilings. In this way, in the price chart, the second ceiling is higher than the first ceiling, but in the indicator, the second ceiling is lower than the first ceiling. Look at the picture below.

Normal negative divergence

Note that divergence is not necessarily seen when the trend changes, but divergence can be a sign of a trend reversal. The trend may change and show no divergence. A typical negative divergence means a weakening of buyers ‘power and sellers’ dominance over them, which helps the technical analyst to determine the end of an uptrend.

Well, so far you are familiar with the two usual positive and negative divergences. The common word is because in the descending process the peaks and in the ascending process the peaks are examined . Look at the pictures above again. This can help you better remember these divergences.

3- Positive latent divergence (HD +)

Hidden Divergence refers to the group of divergences that deal with peaks in the downward trend and valleys in the upward trend (as opposed to normal divergence). You can see the hidden positive divergence below.

Positive latent divergence

Whenever in an uptrend (it can also be in a downtrend ), the price chart of a higher floor is recorded but the indicator does not succeed, a positive hidden divergence is formed, which indicates the continuation of the positive trend .

If the divergence is within the support range, it is more valid.

4- Negative hidden divergence (HD-)

Whenever in a downtrend (it can also be in an uptrend ), the price chart of a lower peak is recorded but the indicator fails to do so, a hidden negative divergence is formed which indicates the continuation of the downtrend . You can see the hidden negative divergence below.

Positive latent divergence

All kinds of divergence at a glance

Note that these 4 types of divergence are probably a bit difficult to remember. Here you can see all kinds of divergences at a glance. Contemplate this notion as you interact with your loved ones. Of course, you will have to go back to this page later for a reminder, so save this page in your browser.

Teaching different types of divergence in technical analysis

In what indicators is divergence seen?

This point is usually ignored in the discussion of divergence training in technical analysis . Divergences exist in different indicators, but not all indicators are able to show divergence. On the other hand, the validity of divergence is not the same in all indicators. The following divergence is more valid in the indicators:

RSI
MACD
MFI
OBV
ROC
CCI

Conclusion

In this article, we taught the types of divergence in technical analysis and tried to explain the different types of divergence in a simple way with illustrative images. We pointed out the main divergence, which included the following:

Normally positive divergence
Normal negative divergence
Positive latent divergence
Negative hidden divergence

We hope you make the most of this article. Note that divergence observation should not be the criterion for buying and selling, and an experienced analyst has learned over time that divergence may be fielded. Accordingly, you must validate the divergence. In technical analysis, everything is expressed as probabilities, and this is part of the essence of technical analysis.

What is divergence?