Divergence

Community Submission - Author: Caner Taçoğlu

Trading volume is one simple example of an indicator that can produce divergences. In this case, the market price will create a divergence when moving in a direction that goes against the trading volume. For instance, if an asset’s price is moving up with a decreasing trading volume, one could consider this to be a divergence.

Divergences can be positive and negative, but note that they are not always present. A positive divergence may occur when the price of an asset is decreasing, but the technical indicator suggests an increase in the buying forces (or decrease in selling). As such, a positive divergence may be considered a bullish sign and, in some cases, may precede a price reversal to the upside. In contrast, a negative divergence is seen when the price of the asset is increasing, but the indicator indicates a weakening in the buying forces (or stronger selling pressure).

Divergences may help traders determine their entry and exit points, as well as their stop losses. However, divergences should not be relied on primarily as they are not always visible and can also produce false trading signals.