Divergence and Convergence -Bullish and Bearish Reversal Analysis

Divergence and Convergence

0 0 Vote
Instructor

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.

Divergence and Convergence - Levels, Support and Resistance Lines and Trends - Buy and Sell signals

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.

Divergence and Convergence - Close Buy Orders, On Peaks, Indicator - Moving Average MACD Bars

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.

Divergence and Convergence - Awesome and Relative Strength Index Levels - Peaks and Valleys on Market Price

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.

Divergence and Convergence - Bullish and Bearish Reveasl Trading Signals, AO and RSI Indicator

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.

Divergence and Convergence - Triple and Double Top and Bottom - Fibonacci and Wedge Confirmations

  • 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.

Linkages & Notices

You can also view the video of this session available on the PFOREX Financial Video tutorials.

You can also find the video of this session on PFOREX YouTube Channel.

PFOREX Assist app provides BEST & FREE trading signals and market analysis. PFOREX Assist is available on App Store (iOS version) & Play Store (Android version).

The PDF file of this session is also available.


PFOREX Educational materials in text and video formats are developed by PFOREX Department of Education to enhance and improve investors’ knowledge and trading skills. Due to high risks and volatile fluctuations in financial markets, traders and investors must develop their trading skills and knowledge. It is strongly recommended to apply Risk and Capital Management when trading in financial market.

Tags

Comments

Copyright © 2011-2018 PFOREX.COM | Professional Forex School | Cashback and Rebates