The Third Eye: 2014

Sunday, December 28, 2014

Divergence in Indicators

REGULAR DIVERGENCE :

If price is making lower lows (LL), but the oscillator is making higher lows (HL), this is considered to be regular bullish divergence.

This normally occurs at the end of a down trend. After establishing a second bottom, if the oscillator fails to make a new low, it is likely that the price will rise, as price and momentum are normally expected to move in line with each other.

Below is an image that portrays regular bullish divergence.

Now, if the price is making a higher high (HH), but the oscillator is lower high (LH), then you have regular bearish divergence.

This type of divergence can be found in an uptrend. After price makes that second high, if the oscillator makes a lower high, then you can probably expect price to reverse and drop.

In the image below, we see that price reverses after making the second top.

HIDDEN DIVERGENCE :

Divergences not only signal a potential trend reversal; they can also be used as a possible sign for a trend continuation.

Hidden bullish divergence happens when price is making a higher low (HL), but the oscillator is showing a lower low (LL).

Once price makes a higher low, look and see if the oscillator does the same. If it doesn’t and makes a lower low, then we’ve got some hidden bullish divergence in our hands.

hidden bearish divergence. This occurs when price makes a lower high (LH), but the oscillator is making a higher high (HH). By now you’ve probably guessed that this occurs in a downtrend. When you see hidden bearish divergence, chances are that the pair will continue to shoot lower and continue the downtrend.