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Basics of Divergence Masterclass 1
Basics of Divergence Masterclass 1
Hello all, today we are going to learn about divergence. A simple topic, which often confuses
the newbies. I'll keep this thread short since this will lay the groundwork for the upcoming
threads. Please go through this thread before proceeding to the next threads.
Foreward:
In this thread, I would explain the following as easily and briefly as possible:
1. What is divergence?
2. What are the different types of divergence?
Introduction
When the price of a stock moves in a certain direction, the momentum oscillator should also
move in the same direction.
Example: When the Price makes a higher high(HH), the momentum oscillator should also make
a higher high(HH). This is called convergence since both, the price and the momentum are
converging in the same direction.
In a few circumstances, the momentum oscillator and the price do not follow the same path.
This is called Divergence.
What is Divergence?
When the price of an asset is moving in the opposite direction of a technical indicator, such as
an oscillator, it is called divergence. Divergence warns about the underlying weakness in the
current trend. The price may or may not reverse at the exact occurrence of the divergence.
Useful Tips:
1. You should not rely on divergence solely, as it doesn't provide timely trade signals.
2. Divergence can last a long time without a price reversal occurring.
3. It may NOT play out sometimes. Hence, it is just like any other indicator which has a
probability of working out but NOT a certainty.