Divergences Are Important Trend Reversal & Trend Continuation Signals!Divergences are an important pattern that tell about trend reversal or trend continuation. However, trading these divergences is not a complete trading method as you need indicators to get trading signals. Divergence is when price action and the indicator move in opposite directions.
Now any oscillator can be used to show divergence patterns. The most commonly used oscillators include RSI, Stochastics, MACD, CCI, ROC and Williams %R. However, any oscillator can show divergence with price action.
Divergence can be of two types regular divergence or hidden divergence. Regular divergence is of two types, bullish regular divergence or bearish regular divergence.
Bullish Regular Divergence happens when the indicator makes a higher low while the price action makes a lower low. It means a potential trend reversal from an uptrend to a downtrend. A bearish regular divergence takes place when the oscillator makes a lower high while the price action makes a higher high.
When this regular divergence pattern appears on the chart it means that the price action is losing its momentum which in turn means a potential trend reversal or consolidation. When you spot a regular divergence pattern appearing on the chart, you should not ignore it as it is a warning that a potential trend reversal can take place.
Now, the case of the hidden divergence is the exact opposite. Regular divergence patterns indicate potential trend reversal whereas the hidden divergence patterns indicate trend continuation. Again just like the regular divergence patterns, there are two hidden divergence patterns.
In Bullish Hidden Divergence, the oscillator makes lower low while the price action makes a higher low whereas in the bearish hidden divergence, oscillator makes a higher high while price action make a lower high.
The appearance of a hidden divergence pattern means trend continuation. Hidden divergence is considered to be a far stronger trading signals as compared to the regular divergence.
You can use a Divergence Pattern Recognizer Indicator to identify these divergence patterns. However, these patterns only confirm trend reversal or trend continuation. You will still need indicators to make entry and exit into a trade.