Divergence Masterclass 1 - What is Divergence?

1 Jun 2021

Hello all, today we are going to learn about divergence. A simple topic, which often confuses the newbies. I'll keep this thread short since this will lay the groundwork for the upcoming threads. Please go through this thread before proceeding to the next threads.

Foreward
In this thread, I would explain the following as easily and briefly as possible:
1. What is divergence?
2. What are the different types of divergence?

Introduction
When the price of a stock moves in a certain direction, the momentum oscillator should also move in the same direction. Eg. When the Price makes a higher high(HH), the momentum oscillator should also make a higher high(HH). This is called convergence since both, the price and the momentum are converging in the same direction.



In a few circumstances, the momentum oscillator and the price do not follow the same path. This is called Divergence.

What is Divergence?
When the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator, it is called divergence. Divergence warns about the underlying weakness in the current trend. The price may or may not reverse at the exact occurrence of the divergence.

Different types of Divergence
Broadly, divergence can be classified as a positive and negative divergence. The positive divergence is also known as the Bullish divergence, while the negative divergence is called a Bearish divergence.

1. Bullish divergence/Positive divergence
Positive divergence signals that the price could start moving higher soon. It is of 2 types:

• Regular Bullish divergence
  
• Hidden Bullish divergence

Some illustrations of Bullish divergence:




2. Bearish divergence/Negative divergence
Negative divergence signals that the price may soon start falling to lower levels in the future. It is of 2 types:

• Regular Bearish divergence
  
• Hidden Bearish divergence

Some illustrations of Bearish divergence:




Conclusion:
I hope you may have got a better idea about divergence now. I'll post the next thread explaining bullish and bearish divergence separately as I didn't want to clutter this thread.

Useful Tips:
1. You should not rely on divergence solely, as it doesn't provide timely trade signals.
2. Divergence can last a long time without a price reversal occurring.
3. It may NOT play out sometimes. Hence, it is just like any other indicator which has a probability of working out but NOT a certainty.