Divergence occurs when an asset’s price moves in the opposite direction from other data or a technical signal, such as an oscillator. Divergence signals that the price trend may be waning and, in extreme situations, may even result in a price reversal.
Divergences can be both good and bad, but it’s important to remember that they’re not always there. For example, when an asset’s price is down, but the technical indicator indicates that the buying forces are strengthening, there may be a positive divergence (or decrease in selling). As a result, a bullish indicator, a positive divergence, could sometimes indicate a price reversal to the upside. In contrast, a negative divergence is exhibited when the asset’s price rises, but the indication shows that the buying power is waning (or more substantial selling pressure).
Divergences may aid traders in deciding where to place their stop losses, entry positions, and exit points. Divergences, however, should not be depended upon as a primary indicator because they are sometimes difficult to see and can result in erroneous trading signals.
