Divergence remains a complicated understanding for new traders. Thus here is the simple way to understand technical divergence. It is clear in previous articles that divergence is present in both negative and positive ways. The negative divergence occurs when security price is an uptrend and a major indicator. The epitome would be the moving average convergence divergence (MACD), price rate of change (ROC), or relative strength index (RSI). In the negative divergence, these rates move downward.
In literal meaning, MACD is a trend following a particular indicator that presents the relationship between two moving averages of a security’s price. The calculation of MACD comprises the subtraction of the 26-period of EMA (exponential moving average) from its 12-period. ROC or the price rate of change is a technical indicator measuring the change percentage between prices in certain periods. The purpose of ROC is always against zero with moving upwards indicators into positive price changes. Then, RSI or relative strength index is also a technical indicator for momentum trading. It is measuring the speed of the current security price.
It is different from the positive divergence. Positive divergence happens when the price is at downtrend but the indicator is rising. Thus, a reliable sign appears for the price of assets may be reversing. In order to use divergence as trading decisions, it is vital to note the occurrence of divergence indicators in certain periods of time.
So, tools like support, trend lines and resistance levels should be used to make sure about the reversal. Understanding divergence helps traders to get profitable trades. This is because it leads traders to understand and respond to the changes in price action. It gives the alarm that price is no longer the same, thus traders should make options.