NexusFi: Find Your Edge

Home Menu



When the price of an asset and an indicator, index or other related asset move in opposite directions. In technical analysis, traders make transaction decisions by identifying situations of divergence, where the price of a stock and a set of relevant indicators, such as the money flow index (MFI), are moving in opposite directions.

Read more: Divergence Definition | Investopedia

In technical analysis divergence is considered either positive or negative, both of which are signals of major shifts in the direction of the price. Positive divergence occurs when the price of a security makes a new low while the indicator starts to climb upward. Negative divergence happens when the price of the security makes a new high, but the indicator fails to do the same and instead closes lower than the previous high.

Read more: Divergence Definition | Investopedia

Divergence trading is both a concept and a trading strategy that is found in almost all markets. It is an age old concept that was developed by Charles Dow and mentioned in his Dow Tenets. Dow noticed that when the Dow Jones Industrials made new highs, the Dow Transportation Index tends to make new highs as well and when the Industrials index made new lows, the transportation index would also follow suit. This is because when industrial production is high, transportation is used more to ship the goods. During times of recession or slowdown, when production dropped, the transportation would also drop.

The most important of all is when Dow found out that when there was a divergence between the two, it presented a possible change in the markets. For example, when the Dow Industrials made new highs and when the transportation index failed to make a high it indicated that there was some discrepancy. This formed the basis of divergence theory which was soon developed into a trading system on its own.

So, in the context of the markets, when price makes a new high, the oscillator, index or other related asset also should make a new high. Or when prices make a new low, the oscillator, index or other related asset should ideally make a new low. When there is a discrepancy between price and the oscillator, index or other related asset a divergence is identified.

Source: (with some minor edits).

Divergence trade setups can be spotted in any time frames and are classified into two main types.

Regular Divergence
Hidden Divergence

The table below gives a brief summary of summary of various divergences and what they represent:

Divergence Price Oscillator Signal
Bearish Divergence Higher High Lower High Sell
Bullish Divergence Lower Low Higher Low Buy
Hidden Bearish Divergence Lower High Higher High Sell
Hidden Bullish Divergence Higher Low Lower Low Buy

Source: also:

© 2023 NexusFi™, s.a., All Rights Reserved.
Av Ricardo J. Alfaro, Century Tower, Panama City, Panama, Ph: +507 833-9432 (Panama and Intl), +1 888-312-3001 (USA and Canada)
All information is for educational use only and is not investment advice. There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
About Us - Contact Us - Site Rules, Acceptable Use, and Terms and Conditions - Privacy Policy - Downloads - Top