Divergence is a signal analysis indicators on the Forex market, fixing the appearance of an extremum in the value of the asset, where certain market trends dominate. This kind of analysis is the most accurate, because the indicators knock out the price directions in the indicator before it becomes available when using other similar tools. What is meant: the price of the asset moves in the trend, but the indication points to the opposite (the trend has weakened and is moving obliquely), this indicates that the control group of traders is already giving up positions, which leads to changes in the direction of price movement.
The market participants are divided into two categories: some believe in divergence, and some do not. Most people are used to classical technical analysis and all of its features, but the divergence is a new trend. The tool is popular with the most courageous investors who believe that the classical signals should have been put aside long ago. But there are also those who combine the usual analysis with the new market trends and indicators in their practice.
In this article we will consider several types of combined use of price divergence:
1. RSI Indicator
The divergence is detected due to the trend direction and the extremums associated with it. When you change from an uptrend to a downtrend, there will be a clear dip on the chart, such troughs are harbingers of an uptrend. In a downtrend you fix the price peaks (standard indicators cannot fix peaks), and then in 99.9% of cases a downtrend divergence occurs.
2. The MACD indicator
We considered the basics in point 1, but it is worth noting that MACD is one of the most convenient and technologically advanced indicators for working with divergence. If you dig deeper, you can find other instruments (e.g. oscillators) working with trends.
The subject of divergence is quite vast, so we should also pay attention to the number of extrema: the most common structure has two extrema but sometimes we can find three or even four divergences in a single chart. Depending on the price movement trend, the chart does not fix the movement of the extremum, after which the price breaks the trend line and continues its formation (this is the strongest divergence in the market).
Traders should pay attention to signals such divergence, despite the fact that such phenomena in the market are quite rare. Combine standard trading signals, divergences, technical analysis and market news to make profitable trades and stay in the black.