What Is Divergence?
Divergence occurs when the price of a security and a trading indicator move in opposite directions. Below, in the 3-month chart for Ford (NYSE: F), the price of the stock from mid-October through mid-November moved downwards while the MACD indicator moved upwards.
Positive Divergence vs. Negative DivergenceTwo types of divergence exist - positive and negative. Positive divergence occurs when the price of the security moves downwards as the indicator moves upwards. The chart above is an example of positive divergence. Conversely, negative divergence occurs when the price of the security moves upwards as the indicator moves downwards. Positive divergence is used as a buy signal, whereas, negative divergence is used as a sell signal.
How To Use Divergence As A Trader
When a trader notices positive divergence or negative divergence occurring, the trader should watch for the price of the security to break the current trend line. In positive divergence, the price of the security will break upwards above the down trend line. In negative divergence, the price of the security will break downwards below the up trend line. In the chart example above for Ford, an acute trader would have noticed positive divergence occuring from mid-October through mid-November. The trader would have waited for the buy signal when Ford's stock price broke upwards above the down trend line at the end of November.
When a trader notices positive divergence or negative divergence occurring, the trader should watch for the price of the security to break the current trend line. In positive divergence, the price of the security will break upwards above the down trend line. In negative divergence, the price of the security will break downwards below the up trend line. In the chart example above for Ford, an acute trader would have noticed positive divergence occuring from mid-October through mid-November. The trader would have waited for the buy signal when Ford's stock price broke upwards above the down trend line at the end of November.
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