Divergence and Convergence
Forty Second session of Forex Training
Welcome back to Forex professional training in financial markets.
In this session Divergence and Convergence will be studied thoroughly.
Divergence and Convergence
When transaction volume does not support a given trend direction despite further advance, then Divergence or Convergence will occur.
For instance, Price has increased to a certain level with further upward direction, however, most of the traders did not have tendency to place Buy order anymore and some of them closed their orders.
In Convergence and Divergence condition, trend continues its current direction with little orders placed by traders.
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Divergence
In Divergence state, market price continues its increasing direction and new peaks are higher than earlier peaks with an upward trend, however, oscillator trend is decreasing and new waves and peaks are lower than earlier waves.
This shows that traders do not support further rise, yet market price is increasing.
Divergence does not indicate any Sell order but it discourages traders from placing a Buy order.
It is recommended that traders close their Buy orders.
Convergence or Negative Divergence
In Convergence state, market price continues its decreasing direction and new valleys are lower than earlier valleys with a downward trend, however, oscillator trend is increasing and new waves and valleys are higher than earlier valleys.
This shows that traders do not support further fall, yet market price is decreasing.
Convergence does not indicate any Buy order but it discourages traders from placing Sell order.
It is recommended that traders close their Sell orders.
Divergence is formed on peaks while Convergence is formed on valleys.
RSI, MACD and AO are the most effective and popular oscillators which can detect Convergence and Divergence considerably.
Traders must consider that most of the time Divergence and Convergence are not valid and they do not show correct trend direction due to the fact that they have opposite direction of market trend.
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On MT4 platform, MACD is inserted into the chart.
On an upward market trend with higher peaks, MACD shows a downward trend in which new peaks are lower than earlier peaks.
This condition shows that traders did not support further market price increase.
Further check on the first two peaks shows us that trend continued its upward direction, even though MACD showed a powerful Divergence on this region.
There is another example that market price had an upward trend and MACD trend decreased.
In this example trader should not have placed any Buy orders as market trend declined.
An example of Convergence on a market downtrend shows that a Sell order was not a suitable trade on this region.
Market price decreased while MACD trend had an upward direction.
Trader can use RSI to detect Divergence and Convergence on a market trend, too.
On a downward market trend, RSI had an upward trend. Convergence can be detected by connecting valleys of both trends via Trendline.
Another Convergence has formed on another timeframe.
Despite a downward market trend, RSI trend increased so it was an unfavourable point to place a Sell order.
A Divergence has formed on the next waves where market trend had an upward direction and RSI trend declined.
MACD is more convenient to detect Convergence and Divergence rather than RSI.
Trader must consider some remarks if he/she intents to place an order by using Divergence or Convergence;
- Some reversal patterns, such as Head and Shoulders, Double Top and Bottom, Triple Top and Bottom or Wedge, can confirm the Convergence or Divergence to place a successful order.
- Overbought and Oversold can confirm the preferred order derived from Convergence or Divergence.
- Divergence and Convergence confirm that trader must close the order which has agreeing direction with a market trend.
- If there is a short reversal swing on a long trend, Convergence and Divergence can exploited to detect points for placing orders with agreeing direction with the long trend.
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- Reversal candles can confirm the Convergence or Divergence signals.
- Fibonacci pattern can be exploited to derive confirmation of Convergence or Divergence signals.
- Support and resistance lines can be exploited to obtain confirmation of Convergence or Divergence signals.
That concludes this session, until next time and another session take care.