What is Divergence?
Let's find out Divergence meaning, definition in crypto, what is Divergence, and all other detailed facts.
In the world of finance, divergence happens when the market price of an asset moves in the opposite direction of another piece of data. The latter is usually expressed with a technical indicator. Traders and investors use divergences to try to figure out if a market trend is weakening. The weakening of the market trend could lead to a trend reversal or a consolidation period.
One of the more obvious examples of a divergence-producing indicator would be trading volume. When the market price moves in the opposite direction of the trading volume, a divergence occurs. For example, divergence might occur if the price of an asset rises while the trading volume falls.
Divergences can occur between the market price of an asset and any other piece of data. However, they are mostly associated with technical analysis indicators. Particularly with various oscillator types including Klinger Oscillator, Relative Strength Index (RSI), and Stochastic Oscillator.
There are two types of divergencies – positive and negative. When the price of an asset falls but the technical indicator spots a rise in buying (or a fall in selling), a positive divergence occurs. As a result, positive divergence can be interpreted as a bullish indication. Besides that, it can even signal an upward price reversal.
A negative divergence, on the other hand, occurs when the asset's price rises but the indicator shows a decrease in buying (or an increase in selling).
Thus, divergences can assist traders in determining when to open or close a position. In addition, they can help determine stop-loss levels as well.
Though keep in mind that you should not be dependent solely on divergencies. This is because they are not always visible. Besides, they can provide misleading trade signals.