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Learn the Divergence in Technical Analysis

22-01-2018 | No Views : 51

Learn the Divergence in Technical Analysis

The price break or the divergence when it is formed on the price chart is a potential reversal signal may cause a reversal of the trend, as the emergence of the Divergens in the upward trend is a sign of the probability of falling price is closer to continue in the previous direction and then called a negative Divergens, A drop is a sign of a bullish approach and then a positive divergence is called.

What is the Divergence?

The divergence or price break is a sign of a deviation in the direction, as the price direction is different from the direction of the technical indicator, which means that there is a contradiction between the price and the index, then we may see the price in a bullish direction component higher than the top, while the technical indicator in a downward direction Forming a summit less than a peak, and then a signal that prices are too high and the time of reflection is near.

Technical indicators used in the discovery of Divergens

We can use the RSI, Stochastic or MACD, and in this lesson we will use the MACD indicator in the explanation and explain the examples of the DIFERGENS. You can also take advantage of the technical indicators lesson series. Technical Analysis of Financial Markets.

Types of the divergance

There are two types of price break: Regular Divergence and Hidden Divergence, and there are three classifications of the usual Divergence, as we will discuss in detail in this lesson.

Regular Divergence

As mentioned above, the normal Divergence has three classifications that vary in strength. It also has two types: Positive Divergence and Negative Divergence.

The regular Divergens classifications are divided into:

  • Class A
  • Class B
  • Class C

The first classification of the regular Divergens Class A

This classification is the strongest in the ratings in terms of credibility, as its composition in one of the upward or downward trend is a strong signal to the possibility of change of direction, which helps predict the future price movement well when combined with other technical analysis tools.

Composition of price break rating Class A

  • When the divergence comes from this category in a bullish direction, the price is at two peaks higher than the top, and the MACD is two peaks lower than the top, as shown on the chart in the picture shown below in the second example.
  • On the downside, the price is two bottom lower than the bottom, and the MACD shows a bottom higher than the bottom, as shown on the chart in the picture shown below in the first example.

Example 1:

Regular Divergence
In the clear example on EUR/USD chart in the attached picture, we see a bottom below the bottom of the price versus a higher bottom than the MACD to complete the Positive Regular Divergence of the first category, and then we saw the price reversal and then the upside move.

Example 2:

Negative Divergens 
In the accompanying picture, the EUR / USD chart has seen the price rise to form a high above a top against a low of a peak on the MACD, thus completing a negative regular divergence from the first and then reversing the price.

The second classification of the regular Divergens Class B

Is the most important rating after the first classification of the regular Divergence, and its appearance on the graph is an important indication of the possibility of a reversal of the price in the coming period.

Formation of the second classification of the normal Divergens

  • When the price is set for two equal bands at the same price level, opposite them have a peak lower than the top of the MACD index, in an upward direction that indicates a negative natural divergence from the second rating, as shown on the graph in the picture attached to the first example.
  • Also, if the price is set to two levels at the same price level as opposed to having a bottom higher than the bottom of the MACD index, a positive divergence signal is indicated by the second rating, as shown in the graph in the picture attached to the second example.

The first example

Negative price break
We note that the Regular Negative Divergence of the second ranking on EUR/USD has completed after two equal peaks have been completed on the price, versus a low of a peak on the MACD, to see the reversal of the price and the subsequent decline.

The second example

Positive price break
Looking at the chart in the attached picture, we see a positive positive divergence on EUR/USD chart, after two bounces on the price versus a higher bottom of the MACD, causing the price to reverse.

The third classification of the regular Divergens Class C

This classification of price deflation is less important as it is not in the strength of the first and second classification, because the price is not always reflected after its composition, but this does not diminish its importance as it can produce satisfactory results when combined with other tools of technical analysis.

Formation of the third classification of the normal Divergens

  • When a peak above the top of the price is seen against two equal peaks on the MACD, the negative regular Divergence signal is indicated by the third classification, as shown in the picture attached to the first example.
  • The emergence of a bottom lower than a bottom on the price, versus two equal points on the MACD, is a positive regular Divergence signal from the third category, as shown in the chart accompanying the second example.

The first example

Negative breakthrough
In the following example, we note that a peak higher than a price high versus two equal peaks on the MACD, on GBP/USD chart, completes the negative divergence from the third.

The second example

Positive breakthrough
Looking at GBP/USD chart in the attached picture, we see a lower bottom from the bottom of the price versus two equal points on the MACD, thus completing the positive daily divergence from the third.
The third type is the least credible, so be careful when trading it. The integration of the three categories with the other tools for technical analysis will result in better and more accurate results.

Hidden Divergence

After dealing with the normal price break with its three categories, we will deal with the second type, which is the hidden divergence that comes in the upside or bearish direction, to indicate that the prices are close to the reversal and the change of direction, and comes after the second classification of the normal Divergence.

The formation of the hidden divergence

  • The hidden divergence is formed on the upside, after a low top of the top against the top of the MACD, to be called Negative Hidden Divergence, to reflect the possibility of a bearish reversal.
  • The bearish trend is completed after a bottom above the bottom of the price versus a lower bottom of the MACD, then called the Positive Hidden Divergence, as a signal to raise the probability of a price rally.

The first example

Looking at the chart in the attached picture, we see that the price is bullish and the MACD is on a bearish top, forming a negative negative divergence and the price is reflected after it.
Divergens invisible negative
Note, it is not necessary that the shape of the peaks be typical in the price or the indicator, it is possible to be clearly shown in the chart attached in this example.

The second example

Divergens is positive
In this example, the positive negative divergence was completed after completing a lower floor than a bottom on the price versus a higher bottom than the MACD, as shown in the accompanying picture.
Dear reader, we have completed the lesson of learning the Dyfergens in the technical analysis, and we hope to benefit from this tool in the technical analysis and trading because of the importance of helping the shops or analyst to predict the movement of the price of the future.

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