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Divergence


In trading, divergence is when one indicator is moving in a contrary direction to another or to the actual price action itself. It’s used by technical analysts to try and catch trend changes before they’re confirmed by the market.

For instance, price action on the chart may be setting higher-highs, whereas an overbought/oversold technical indicator such as RSI (Relative Strength Index) is setting lower-highs.

Such a signal could be read as negative divergence, which warns the trader in question that even though the price is setting new highs, the strength of the moves are weakening and could be signalling a change in trend.

Divergence can be either positive or negative but should not be used in isolation. As with all other technical indicators, it should be used in combination with other indicators to confirm the signal being generated.

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