Divergence and Convergence in Trading: How to Use Signals
Author: Victor Gryazin
Dear Clients and Partners,
This article is devoted to such terms as divergence and convergence as well as their use in trading.
What is divergence
Divergence is the instance when the price chat diverges with the used trading indicator. This looks as follows: in an ascending movement the price chart forms a new high that is higher than the previous one while the indicator shows a high that is no higher than the previous one. This inequality might mean that the bulls are losing power, so next thing a descending correction or even a reversal follows.
A classic divergence consists of two highs of the price chart and two corresponding highs of the trading indicator. One of the most popular indicators for catching divergences is the MACD (Moving Average Convergence/Divergence).
How to use convergence and divergence in trading
A divergence or a convergence on the chart is considered a useful trading signal. Many traders fish for them to open or close their positions.
To catch convergences/divergences, various indicators can be used, the most popular of them being the MACD, RSI, and Stochastic. Convergences/divergences can be traded on any highly liquid assets, on timeframes from H1 and higher.
How to sell with divergences
When a divergence appears, it gives a signal to sell: the quotes set a new local high but the indicator does not confirm it. However, quite often signals from divergences go against the current trend, giving a good reason for closing profitable positions because a reversal becomes too possible.
As for opening new positions against the trend, here one needs to be extremely careful. Beginners should rather abstain from this. To open new positions, divergences during corrections are better. If there is a correction of a downtrend, and a divergence appears in the meantime, this is a good signal to sell. Positions should be open by the current trend
Example of selling by a divergence
On H1 of GBP/USD in an ascending correction the MACD signaled about a divergence.After a local high formed and the price reversed downwards, a selling position by the trend can be opened.Stop Loss is to be placed behind the last high, and Profit can be taken as soon as a strong support level is reached.
Bottom line
Divergence and convergence stand for the process of diverging/converging of the price chart and the trading indicator. These are good trading signals used for opening and closing positions.
To make signals more efficient, the divergence/convergence should be used alongside other instruments of tech analysis. Before trading for real, practice on a demo account.
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Sincerely,
RoboForex team