Asset prices are constantly shifting, and you need an indicator to help you know the direction of movement relative to a given technical detector. That’s where the divergence detector comes in –it is a momentum oscillator that warns you as a trader or technical analyst of the changes in price trend or simply divergence.
The divergence indicator works with other technical indicators and/or trading data when assets’ prices are moving in a direction(s) opposite or counter to that of another indicator. The relative movement to that of the indicator, referred to as divergence, is useful in tracking and analysing the momentum in an asset’s price and the probability of a price change in the opposite direction within the current trend. (Look at the historical prices of several stocks and trading assets on Tradinview’s charts)
How Does It Work?
But these movements are opposite to those of other technical indicators. For instance, positive divergence tells a trader that prices are likely to start rising –this happens when the price is moving lower, but another technical indicator shows a counter-movement of increasing prices, indicating bullish signals. A negative divergence, on the other hand, shows bearish signals.
Divergence Indicator | Indicator Series Click To TweetThus, based on a “zero” signal line, a crossing below to above zero indicates that the divergence is bullish and a crossing from above to below zero bearish.
Calculations
Using a 26- and 12-period Exponential Moving Average (EMA) Indicator, one can calculate the divergence by subtracting the value of the 26-period EMA from the 12-period. Since the divergent indicator is a momentum oscillator, the shorter EMA continuously converges toward and diverges from the longer EMA, causing the divergent indicator to oscillate around the zero signal. One has the liberty to adjust these parameters to suits their criteria.
The Bottom Line
In combination with other indicators, divergence helps traders and technical analysts identify trend reversals and long-term or short-term market patterns. But it is advisable always to use it with other indicators to come up with more accurate and reliable price trends to use in decision-making.
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