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Technical Analysis: Divergences

Image: Divergeces between lows or highs on the price action and the MACD can provide valuable signals.

So, technical analysis?

Technical analysis is something that newbie crypto-traders search for a lot while the sheer amount of resources is astounding. Often, the little Youtube channels are the best since they are managed by people who make living of trading and don’t have as much time to promote the Youtube channel - which is why most often you will not hear about them.

TA Indicator: Divergences

There is one channel maintained (occasionally) by a redditor /u/drwd. He does a series called “Better know an indicator” which already provided a very fine intro to the Ichimoku cloud for many traders. He made a good video on divergences (“divs”) that is worth looking at unless you are a seasoned trader.

Divergences in short

Divergence happens when market price disagrees with indicators action. Divergence can be regular, hidden and exaggerated.

Regular Div is a sign of trend reversal. Price keeps the trend but indicator already shows the reversal.

  • Signal to short = the price makes higher high but MACD makes lower high. Underlying weakness, possible exhaustion of a bull trend.
  • Signal to long = the price makes lower low but MACD makes higher low. Underlying strength, possible exhaustion of bears.

Hidden Div is a divergence that follows the trend.

  • Signal to short = price makes lower highs but MACD makes higher highs. Tends to be found during a retracement up during a downtrend.
  • Signal to long = price makes higher low but MACD makes lower low. Tends to be found during a retracement in an uptrend.

Exaggerated Div is similar to regular div but price action makes double tops and double bottoms.

The logic behind divergences is that sometimes the indicators shows hidden tendencies of the market (strength or weakness) that might not be visible from the price action yet.

It’s not 100%, as always with technical analysis - the divergence can only inform you about a bias.

If you’ve read the list above it should be clear to you that you should first look at the bigger picture - are we in an uptrend or a downtrend? - and then start looking for divergences.

If you master them you can use them as a signal to enter or exit the market - they mark good spots for dip-buying and rally-selling.

Good to read:

”dukascopy.com / Do you know everything about divergences?” - The image above is taken from dukascopy.com

Divs on dukascopy.com

”babypips.com / Divergence cheat sheet” - As images below. PRINT THEM!

Cheatsheet on babypips.com

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