Institutional Trading

Divergence Trading

Divergence trading is a technical strategy based on the observation that asset prices and their related indicators (like RSI, MACD, etc.) sometimes move in opposite directions.

Types of Divergence:

Regular Divergence: Predicts potential trend reversals.

Hidden Divergence: Suggests trend continuation.

Tools Used:

Relative Strength Index (RSI)

Moving Average Convergence Divergence (MACD)

Stochastic Oscillator

How Divergence Works:

If prices are making new highs but the indicator isn’t, it signals weakening momentum and a possible reversal.

If prices are making new lows but the indicator isn’t, it could indicate that selling pressure is fading.

Benefits:

Early identification of potential trend changes.

Effective in volatile markets.

Risks:

False signals can occur, leading to premature trade entries.