Divergence: What You Need to Know
Divergence is a critical concept every trader should grasp. It occurs when there's a disagreement between price movements and technical indicators. Essentially, this means that while the price of an asset is moving in one direction, the indicator is suggesting the opposite. This can often signal potential reversals or trend continuations.
You'll typically spot divergence when indicators reach overbought or oversold levels, commonly marked at 20 and 80 on the scale. Understanding this can provide you with valuable insights into market sentiment.
How to Spot Divergence
- Regular Divergence: This occurs when the price makes a new high or low, but the indicator fails to follow suit. It often indicates a potential reversal.
- Hidden Divergence: This happens when the price makes a new high or low while the indicator reflects a lower high or higher low. This can signal the continuation of the current trend.
By keeping an eye on these divergences, you can enhance your trading strategy and make more informed decisions. Remember, it’s all about reading the signals correctly!
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