Divergence trading using MACD or RSI is becoming increasingly popular. When the indicator moves one way and the price the other way, we can quick talk about a divergence. The only other important consideration is looking at local tops and bottoms. Simply diverging indicators are not enough, the tops or bottoms need to fully diverge to talk about divergences in trading.
Regular divergences are used as reversal signals. When regular divergences occur, it indicates that the trend is strong but at the same time the momentum has weakened. It provides a warning that trend reversals (or at least a pull back) are likely to come .
Regular divergences can be powerful and reliable entry points. In fact, out of all oscillators (and any technical indicator in general), regular divergences are considered the most reliable early signs of a local bottom or top.
Especially when confluence is present, regular divergences can provide “high probability” trading setups. Therefore, strategies involving divergences tend to be relatively forgiving when traded using a low Risk Reward Ratio.
Hidden divergences are continuation signals. They are most likely to occur in the middle of a trend and often indicate the end of a pullback within the existing trend.
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