Both theoretically and practically, there have been a lot of trends and tools in economics and finance. Some of these trends and tools explain the opposing forces like in the study of divergence and convergence. In literal meaning, divergence means two things moving apart. On the other hand, convergence means two forces are moving together. In the context of economics, finance, and trading, divergence and convergence describe the directional relationship. The directional relationship here would be between prices, trends, and indicators.
Technically, trends means an overall direction of a market or an asset price. The price highlight would show either swing highs or swing lows for an uptrend. But to put into practice, they show a relationship where the two terms move. Divergence in this case means that the two trends move further away from each other. It is different from convergence indicating how the two trends are moving closer together.
First of all let’s focus on divergence. As represented previously, it happens when the index moves in the other direction. These could be the value of an asset, indicator, index moves and et cetera. It is actually an alarm warning that the recent price trend may be waking. Most likely, the price would change direction. But it does not mean that it is solely a negative alarm or positive alarm. There are a positive and negative divergence.
The positive takes place when a stock is near low but the indicators start to rally. This is called a sign of trend reversal. The potentiality of trend reversal could lead to an entry opportunity for traders. But, negative divergence occurs when prices skyrocket but the indicator signals is at the new low.
