Divergence - asset price direction
Divergence is the discrepancy between the direction of an asset's price and the readings of an indicator. There are three types of divergences: classical, extended, and hidden. The first two can be used to gauge market sentiment and to trade in the opposite direction. Hidden divergence, however, is more significant and can serve as a powerful supplementary factor in determining the price direction and opening positions.
The use of extended divergence is not necessary, as it rarely occurs and forms at equal highs or lows. In such cases, an indicator is not needed to gauge market sentiment; the chart itself will suffice.
Classical Divergence
Classical divergence indicates a potential trend reversal or the beginning of a correction. Bullish classical divergence is identified when a lower low (LL) forms on the chart while a higher low (HL) appears on the indicator.
The masses buy when classical bullish divergence appears, anticipating significant growth. An upward price movement may begin, but after short-term liquidity for buying is exhausted and the price rebalances, a reversal will occur, and the decline will continue. Long positions opened during the correction will become unprofitable. In a bear market, classical bullish divergence typically appears before the start of a correction.
Bearish classical divergence is identified when a higher high (HH) forms on the chart while a lower high (LH) appears on the indicator.
The masses sell when classical bearish divergence appears, expecting a significant decline. A downward price movement may begin, but after short-term liquidity for selling is exhausted and the price rebalances, a reversal will occur, and the growth will continue. Short positions opened during the correction will become unprofitable. In a bull market, classical bearish divergence typically appears before the start of a correction.
The formation of multiple divergences is common. The masses will seize every opportunity to open their positions, leading to unprofitable outcomes. The number of divergences before the start of a correction is not limited. It is recommended to wait for the price to react after reaching the resistance zone. In the example above, the correction began after partially filling the imbalance on the 1D timeframe within the imbalance on the 1W timeframe.
Hidden Divergence
Hidden divergence serves as a confirmation of trend continuation.
Bullish hidden divergence is identified when a higher low (HL) forms on the chart and a lower low (LL) appears on the indicator.
In an uptrend, hidden bullish divergence may form before the continuation of growth, acting as a strong supplementary factor in determining the future price direction and considering positions.
Bearish hidden divergence is identified when a lower high (LH) forms on the chart and a higher high (HH) appears on the indicator.
In a downtrend, hidden bearish divergence may form before the continuation of the decline, acting as a strong supplementary factor in determining the future price direction and considering positions.
Notes
- The RSI (Relative Strength Index) indicator is used to identify divergences.
- RSI is plotted without considering candle shadows.
- Divergence should be viewed as an additional factor to your analysis, not a standalone tool.
- Divergence below the chart will always be bullish, while divergence above the chart will always be bearish.
The use of extended divergence is not necessary, as it rarely occurs and forms at equal highs or lows. In such cases, an indicator is not needed to gauge market sentiment; the chart itself will suffice.
Classical Divergence
Classical divergence indicates a potential trend reversal or the beginning of a correction. Bullish classical divergence is identified when a lower low (LL) forms on the chart while a higher low (HL) appears on the indicator.
The masses buy when classical bullish divergence appears, anticipating significant growth. An upward price movement may begin, but after short-term liquidity for buying is exhausted and the price rebalances, a reversal will occur, and the decline will continue. Long positions opened during the correction will become unprofitable. In a bear market, classical bullish divergence typically appears before the start of a correction.
Bearish classical divergence is identified when a higher high (HH) forms on the chart while a lower high (LH) appears on the indicator.
The masses sell when classical bearish divergence appears, expecting a significant decline. A downward price movement may begin, but after short-term liquidity for selling is exhausted and the price rebalances, a reversal will occur, and the growth will continue. Short positions opened during the correction will become unprofitable. In a bull market, classical bearish divergence typically appears before the start of a correction.
The formation of multiple divergences is common. The masses will seize every opportunity to open their positions, leading to unprofitable outcomes. The number of divergences before the start of a correction is not limited. It is recommended to wait for the price to react after reaching the resistance zone. In the example above, the correction began after partially filling the imbalance on the 1D timeframe within the imbalance on the 1W timeframe.
Hidden Divergence
Hidden divergence serves as a confirmation of trend continuation.
Bullish hidden divergence is identified when a higher low (HL) forms on the chart and a lower low (LL) appears on the indicator.
In an uptrend, hidden bullish divergence may form before the continuation of growth, acting as a strong supplementary factor in determining the future price direction and considering positions.
Bearish hidden divergence is identified when a lower high (LH) forms on the chart and a higher high (HH) appears on the indicator.
In a downtrend, hidden bearish divergence may form before the continuation of the decline, acting as a strong supplementary factor in determining the future price direction and considering positions.
Notes
- The RSI (Relative Strength Index) indicator is used to identify divergences.
- RSI is plotted without considering candle shadows.
- Divergence should be viewed as an additional factor to your analysis, not a standalone tool.
- Divergence below the chart will always be bullish, while divergence above the chart will always be bearish.
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