Investor's wiki

Divergence

Divergence

In finance, divergence happens when an asset's market price is moving the other way of one more piece of data, typically addressed by a technical analysis indicator. Divergences are utilized by traders and investors trying to decide whether a market trend is getting more vulnerable, which might lead to a consolidation period or a trend reversal.
Trading volume is one simple illustration of an indicator that can deliver divergences. In this case, the market price will make a divergence while moving toward a path that conflicts with the trading volume. For example, in the event that an asset's price is moving up with a decreasing trading volume, one could believe this to be a divergence.
Regardless of the way that divergences can happen between an asset's market price and some other piece of data, they are most regularly utilized according to technical analysis indicators, particularly the oscillator types, for example, the Relative Strength Index (RSI), and the Stochastic RSI.
Divergences can be positive and negative, however note that they are absent 100% of the time. A positive divergence might happen when the price of an asset is decreasing, however the technical indicator proposes an increase in the buying powers (or decline in selling). Thusly, a positive divergence might be viewed as a bullish sign and, at times, may go before a price reversal to the upside. Conversely, a negative divergence is seen when the price of the asset is expanding, however the indicator demonstrates a debilitating in the buying powers (or more grounded selling pressure).
Divergences might assist traders with deciding their entry and exit points, as well as their stop losses. In any case, divergences ought not be depended on essentially as they are not generally apparent and can likewise deliver false trading signals.