In technical analysis, convergence and divergence play a significant role. Today’s topic is based totally on trade Divergence and its various types. Based on the three absolute of the market, price, volume and time, divergence forms. Both convergence and divergence are widely used to predict future price action based on current values. It not only predicts the future behaviour but also determines the current market movements. In this article, you will be introduced with the basic theory of Divergence pattern. At the end of the post, I shall give you the link to download AmiBroker AFL (World’s top charting tool) to trade divergence.
What is the Trade Divergence
The term itself carries its meaning, ‘Divergence’ refers to separation or parting. Basically, the method belongs to the trend reversal and continuation pattern. Divergence exists when price action does not agree with a technical indicator. This disagreement happens only at a reverse or continuation position, the position can be bullish or bearish. Here price moves in one direction and indicator in the other. Generally, oscillating indicators are widely used to identify a divergence pattern, for example, RSI, MACD, Stochastic etc.
Types of Divergence Pattern
We are now going to explore different types of Divergence pattern. If we broadly classify the pattern, we will get two segments, Regular or Classic Divergence and Hidden Divergence. Regular is consists of Bearish divergence and Bullish divergence while Hidden is consists of Hidden bullish divergence and Hidden bearish divergence. Let’s explore these types here. In order to explain the different patterns, I am going to take the support of the RSI oscillator but you can choose your oscillating indicator as per your wish. There is no specific rule that you have to use only RSI to identify the divergence pattern.
- Regular Bullish Divergence- This divergence pattern typically forms near the end of a downtrend and it reverses it with the uptrend. Here the price action establishes a lower low while RSI or any oscillating indicator forms a higher low. In order to understand the formation clearly, I have attached an image below:
Here, from the above image, it is clear that the formation is a classic bullish divergence, there is a high possibility of a bullish reverse trend after the divergence.
- Regular Bearish Divergence- It comes prior to a downtrend or at the end of an uptrend. It is exactly the opposite of classical or regular bullish divergence form. In this formation, oscillating indicator makes a lower high pattern while price action establishes higher high. The market tends to go down after the divergence.
As you can notice in the above formation that a bearish trend appears at the end of the divergence. The disagreement between price and indicator is obvious here.
- Hidden Bullish Divergence- Before step into the main discussion of what the hidden bullish divergence is, let’s have a look at the image of it so that the concept will be clear to you.
At a glance, you may be noticed that both the price action and the indicator is in an upward direction but if you look closer, you can see that the indicator’s bottom makes a downward move. Therefore, in this case, the price action makes a higher low while the indicators make a hidden lower low. As you can see at the end of the formation, the market tends to go upward direction. The hidden bullish is a continuation bullish divergence pattern.
- Hidden Bearish Divergence- It is exactly the reverse pattern of hidden bullish divergence. Before proceeding, let’s have a look at the given image below:
This trade divergence forms a bearish reversal trend where the bearish trend continuation happens. The price action makes a lower high while the indicator completes a higher high. It continues the bearish trend. Therefore, the basic distinction between hidden and regular divergence is regular is a reversal pattern while hidden is a continuation divergence pattern.
Download AmiBroker AFL
Hence, these are some basic concept regarding trend divergence. You can follow the pattern in a trade as it is widely noticeable in technical analysis. If you use AmiBroker software, here we provide you with the link to download Amibroker AFL for this. From the link above, you can DOWNLOAD AmiBroker AFL to trade divergence. Check the image above to understand how the indicator looks like.