WHAT IS DIVERGENCE?

Of all the concepts we use in trading, divergence is definitely the most complicated for those
setting out on their trading careers. Divergence occurs when an indicator and the price of a
futures contract we are trading are heading in opposite directions. Negative divergence
happens when the price of a futures contract is in an uptrend and a major indicator - such as
the (MACD), heads downward. Conversely, positive divergence occurs when the price is in a
downtrend but an indicator starts to rise. These are usually reliable signs that the price of an
asset may be reversing. When using divergence to help make trading decisions, it is a matter of
first recognizing it and then observing what the market does. Our software will plot on our
trading screen when divergence plots. In our learning process if we understand when
divergence will plot on the screen and we have a trading positon we have some choices to
make.

Divergence when plotted often leads the market in the opposite direction. This may be a small
move in the other direction or it may actually change the direction of the market for an
extended period of time.

 If we have a position either long or short and divergence plots we exit our position. As
we start our trading practice this is the rule we should use until we get a better
understanding of our indicators and support and resistance areas. Divergence is a
warning to us and in our trade plan we can either exit our position once the Divergence
plot prints or we can
 Make a decision whether to hold our position with our stop loss in place, and judge our
indicators which if all in alignment and below us for a long trade (buy) and above us for
a short trade (sell) should still lead the market in the direction of our trade.
 How does Divergence look on our charts? We use the FIB2FIB Oscillator on the bottom
of our trading chart to observe when divergence may occur. If this does occur then the
words “DIV1” or “DIV2” will plot on our charting software. A wonderful tool to make us
aware and also allow our eye to watch and recognize when the divergence pattern will
appear in the future. It will take a little time to get used to seeing but you will see it
with practice. Let’s take a look at how divergence appears on our charts.
 WHAT IS DIVERGENCE?

A DIVERGENCE EXAMPLE AT A”DOUBLE BOTTOM FORMATION”

 DIVERGENCE AT A DOUBLE TOP FORMATION

WHEN PRICE DOES NOT AGREE WITH OUR MACD INDICATOR WE HAVE DIVERGENCE
 HOW DIVERGENCE LOOKS ON OUR TRADING SOFTWARE

OUR FIB2FIB OSCILLATOR WILL INDICATE THE DIVERGENCE PATTERN FOR US AND CHANGE THE
COLOR OF THE CHART BACKGROUND TO IDENTIFY THE CHANGE IN MARKET PRICE DIRECTION.
DIVERGENCE EXAMPLE (DIV2) PLOT