Divergence Signal [TradingFinder] RSI & MACD Reversal On Swing

27. Feb.

🔵Introduction
Sometimes in analyzing price charts using indicators, you may observe a discrepancy. For instance, while the price of stocks, currencies, or commodities is increasing, the indicator shows a decrease. Such a phenomenon in technical analysis is termed "divergence." Divergences are categorized into three types based on their formation and the prediction they make about the continuation of the price trend: "Regular Divergence," "Hidden Divergence," and "Time Divergence."

🟣Important:
• This indicator exclusively identifies regular divergences since its primary function is to detect reversal points.
• This indicator identifies divergences using three indicators: "Moving Average Convergence Divergence" (MACD), "Relative Strength Index" (RSI), and "Awesome Oscillator" (AO). The user can choose each of these indicators in the settings using the "Divergence Detection Method" dropdown menu for identifying divergences. These settings are by default set to the MACD mode.




🔵Types of Divergence
Divergences, as mentioned, offer different predictions about the continuation of price trends. Hence, they have various types. We will focus on explaining regular divergences based on this indicator.

🟣Regular Divergence(RD):
Regular divergence is a situation arising from contradictory behavior between the indicator and the price chart at the end of a trend. By identifying regular divergences, we anticipate a change in trend direction resembling a reversal pattern.
Regular divergence has two types based on the trend and prediction:

Negative Regular Divergence (RD-):
This type occurs between two price peaks at the end of an uptrend. Despite forming a new high, the indicator fails to recognize it, indicating a negative regular divergence. The likelihood of a subsequent downtrend is high. Negative divergence suggests strong selling pressure and weak buying power, portraying an unfavorable future for the stock.



Positive Regular Divergence (RD+):
In contrast, positive regular divergence happens at the end of a downtrend and between two price troughs. As depicted in the chart, although the price forms a new low, the indicator doesn't acknowledge it. Positive regular divergence indicates robust buying pressure and weak selling power. Upon identifying positive divergence in the chart, we expect a price increase for the stock under review



🔵How to Use

Information from the indicator is displayed in two ways: Table and Label.

🟣Table: The table displays information about the latest divergence. This includes the type of divergence, existence or absence of divergence, consecutive divergences, divergence quality, and change in indicator phase.

Type Divergence: Indicates the type of divergence, which can be either "Bullish Divergence" or "Bearish Divergence."
Exist: Indicates the presence of divergence with a "+" sign and absence with a "-" sign. A green color is used for bullish divergence and red for bearish divergence.
Consecutive: Shows the number of consecutive divergences. For example, if there are 3 consecutive divergences, the number 3 is displayed.
Divergence Quality: Displays the quality of the divergence based on the number of consecutive divergences. If there is 1 divergence, the quality is "Normal"; for 2 divergences, it's "Good"; and for 3 or more divergences, it's "Strong."
Change Phase Indicator: Indicates whether a phase change in the indicator has occurred with "+" for yes and "-" for no.



🟣Label: Unlike the table, which only shows information about the latest divergence, labels display information about each divergence at the point where it occurs. The information includes the type of divergence, detection method, divergence quality, consecutive divergences, and change in phase indicator. The selected method of detection is also displayed. For example, if the chosen method is the "AO" indicator, the label will show "Method: AO."



🔵Settings

Fractal Period: Determines the period of swings. The minimum and default value is 2.
Divergence Detect Method: Selects the indicator (MACD, RSI, or AO) used for detecting divergences. The default indicator is MACD.
Show Fractal: Chooses whether to display fractals or not. The default is "No."
Show Table: Determines whether to display the table or not. The default is "Yes."
Show Label: Chooses whether to display labels or not. The default is "Yes."
Label Size: Adjusts the size of the labels from "Tiny" to "Large."