Divergence — this is one of the key indicators for technical analysis of stock trends, which reflects the discrepancy between the direction of the price chart and the readings of the selected technical indicator.
As a rule, it is easiest to determine the divergence on such oscillator indicators as RSI, Stochastic, MACD, CCI, and others.
It is worth noting that in graphic terms, divergence signals a high probability of an asset price reversal. At the same time, both bullish and bearish divergence can be distinguished. Everything will depend on where the price goes after the turn. Thus, bullish divergence reflects growth, while bearish signals a fall in value.
In stock trading, it is customary to distinguish between several types of divergences:
To begin with, consider the divergence of class “A”. This type of discrepancy is the most significant for traders. On the basis of such a divergence, you can get the highest quality signals. Class A divergence most clearly reflects the reversal price pattern.
The picture for a bearish class “A” divergence is as follows: the new maximum on the value chart is above the previous maximum, while the new maximum on the oscillator graph is below the previous maximum.
The picture for bullish class A divergence is as follows: the new minimum on the value chart is below the previous minimum, and the new minimum on the oscillator graph is above the previous minimum.
In turn, a class “B” divergence may form in the financial market. This type of discrepancy is a less significant signal that needs additional analysis based on other trade indicators.
At the same time, the bearish class “B” divergence looks like this: the maximums of the price chart are at the same level, forming a double top, while the second top of the oscillator graph is an order of magnitude lower than the previous wave.
The picture for bullish class “B” divergence is as follows: the minima of the asset value chart are at the same level, forming a double bottom, while the second vertex on the oscillator is much higher than the previous wave.
Meanwhile, it is also possible to single out another divergence class — the “C” class. The divergence of such a plan is most likely a belated result in a dynamically developing market. This type of divergence cannot be used as a signal. This discrepancy is very poorly expressed and is ambiguous, therefore it is very often ignored by traders.
In the formation of the divergence «C», signaling the price fall, a new maximum impulse with respect to the previous price wave will be recorded on the cost chart. At this time on the oscillator graph, two vertices will be at the same level.
In the formation of the divergence «C», signaling the growth of prices, the second wave will be lower than the first wave on the price chart, while the oscillator graph will reflect a double bottom.
Separately, it is worth highlighting another type of discrepancy, which is called the “triple divergence”. This class of divergence is very rare and is a virtually unmistakable signal in financial markets.
Thus, the discrepancy between the three depressions will be a bullish divergence, and the discrepancy between the three peaks will indicate the development of a bearish asset market. In this case, three peaks will be formed both on the price chart and on the oscillator chart. The direction of their movements will be opposite.
How to determine the divergence? To do this, it is necessary to conduct a visual analysis of the graph of the asset under investigation. Currently, specialized platforms for the convenience of traders offer a number of tools and technical indicators that greatly simplify finding divergences, as well as trading in accordance with the discrepancies found.
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