Experienced trader accustomed to using in their arsenal such a wonderful signal generated by an oscillator, the divergence. This phenomenon manifests itself in displaying the price chart of the next peak / bottom, while its absence in the chart of the oscillator. The most accurate signal generates divergence in an uptrend, as the growth rate must have sufficient momentum so basically use the term "bullish divergence". Falling, or "bearish" divergence rarely seen as reliable signals, since the market can "roll" down to a stop.
Observing the behavior of prices, we can face the opposite picture when on the contrary, the oscillator makes another swing up, and the price chart this fluctuation does not endorse, and is going down. This phenomenon is called back, or hidden divergence, and always clearly signals a continuing trend trends. An example can be seen in the graph below.
The advantage of using the feedback signal divergence in the appropriate sense of its main properties for the basic principles of technical analysis, which declares to us that trend is likely to continue than reverse. Obviously, the entry into the market by using this signal is more secure, in contrast to the open position with the reversal signal.
Determine if a reverse divergence requires some practice, but once you get it, recognize it in the future will not present any difficulty.
Particular attention should be paid to the appearance of reverse divergence in the approaches to the significance of the level, such as the channel and trend lines. Detection in such areas of the signal indicates the presence of potential to a broken trend line or channel.
Since the divergence of both conventional and reverse, yet sometimes give false signals, it is necessary to use other analysis tools, following the principle of completion signal and seek confirmation.
Excellent results gives the practice of combining the use of reverse divergence with moving averages, built at different periods. To determine the buy signal to be detected rising moving average, in combination with a series of market pullbacks. The appearance of such a picture, and will give the command to open a position.
Just a great confirmation to the feedback signal divergence is out next peak (trough) of the critical zone of the oscillator.
Another confirming signal for reverse divergence is the appearance of three consecutive growing candles - in this case the value of the protective stop-loss order is determined by the lowest (low) previous candle.
Divergence, both conventional and reverse, are of great importance in the construction for long time intervals, such as daily, weekly and monthly. It should be remembered that the main factor that guarantees the success of reverse divergence - attention and consistency in its detection, in combination with the presence of one of the above supporting factors.