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Divergences

Divergences are, in my opinion, the simplest, most important and reliable trading indicators. If you learn to identify them correctly and at the right time, you can increase your trading accuracy rate exponentially. But what exactly are divergences ?! Simply put, when the price and the oscillator (RSI, MACD, etc) are moving in opposite directions, a divergence that indicates a potential trend reversal is born.


In total, there are four types of divergences : two bullish ones (regular and hidden) and two bearish ones (regular and hidden). To avoid getting confused when identifying divergences, I created the following basic rules :




Rule A


Price / oscillator Highs must be compared in Uptrends to discover Regular divergences.
Price / oscillator Lows must be compared in Downtrends to discover Regular divergences.




Rule B


Price / oscillator Lows must be compared in Uptrends to discover Hidden divergences.
Price / oscillator Highs must be compared in Downtrends to discover Hidden divergences.




Rule C


Regular divergences rely on the Oscillator divergence line to indicate the future trend Direction.




Rule D


Hidden divergences rely on the Price divergence line to indicate the future trend Direction.




Rule E


Always compare price Highs with oscillator Highs and price Lows with oscillator Lows.