What is Divergence?
Divergence is when the price of a security and any technical indicator or oscillator is moving in the opposite direction or is moving contrary to other Statistical data.
A Divergence in technical analysis signals that the current price trend may be weakening, and in some cases may lead to the price reversal on confirmation of the over-all trend analysis.
There are 2 types of Divergence
- Positive divergence
- Negative Divergence
Positive divergence signals a possible higher move in the price of the asset or the current downtrend might be weakening and Negative divergence signals a possible lower move in the price of the asset or the current uptrend weakening.
Traders use divergence to analyze and confirm the underlying momentum in the price of an asset, and for assessing the likely move ahead of the asset. For example, investors/traders can plot oscillators, like the RSI, Stochastics, MFI, etc. to look for the divergence.
The Difference Between Divergence and Confirmation
Divergence is the relation between the price of the asset and the indicator plotted that is telling the trader different things.
Confirmation is when the indicator, or multiple indicators and the price action theory like Candlestick patterns, support/resistance breakout, and volume all together are telling the same thing. This helps the trader to enter trades perfectly with confidence. If the price is moving up, the traders need confirmation that will indicate bullish signals.