In technical analysis, when the price of a stock and an indicator moves in opposite direction then the difference between the two is called divergence. The decision of buying and selling the stock is purely based on the divergence in trading. Often, the divergence is the leading technical indicator. Use Oscillators For Trading.
Divergence is price movement between various indicators. Several indicators used in relation to the price are moving average convergence /divergence, commodity channel index, relative strength index and others. Regular divergence and hidden divergence are the two main types of divergence. Regular divergence is further broadly divided into two types: positive divergence and negative divergence. In positive divergence, the indicators climb upwards while the price of the stock makes a lower low. Experts believe that when the indicators go down and the price of the stock or security climbs up then negative divergence occurs. Both of these divergences are the signals of the major shift in the direction of the price. Hidden divergence is also same as standard divergence where the price of the stock and an indicator move in opposite directions.
It informs about the time when a trend looks suitable to continue. However, regular divergence gives notification to traders about time for a possible reversal, or alteration in the price direction and hidden divergence gives the notification about ahead of time for the possible continuation of a trend. An indication of the uptrend is reflected in the graph when the indicator makes lower lows and the price of the security makes higher lows. Moreover, the downtrend is shown when the indicator makes higher highs and the price of the security makes lower highs.
Let us understand divergence with an example using indicators. When the price of the stock makes higher lows then uptrend occurs. If the indicator makes lower lows at the same time, hidden divergence occurs. It means that the uptrend will continue. Thus, traders can buy the securities and the stocks. The divergence concept works best in long time frames. As in short time frames, by the time traders or experts spot the divergence, the trend might have already taken place.
Finally, we can conclude by saying that the disagreement between the indicator and the price is called divergence, which has a noteworthy inference in trading. This disagreement of price leads to recognition of opportunity. Traders can make a valuable decision based on divergence.