Trading Style On The Basis Of Price Movement between Various Indicators
When the price of a stock and an indicator moves in opposite direction then the difference between the two is called divergence. The decision of buying and selling the stock is purely based on the divergence in trading. Often, the divergence is the leading technical indicator.
Divergence is price movement between various indicators. Several indicators used in relation with the price are moving average convergence /divergence, commodity channel index, relative strength index and others. Regular divergence and hidden divergence are the two main types of divergence. Regular divergence is further broadly divided into two types: positive divergence and negative divergence. In positive divergence, the indicators climb upwards while the price of the stock makes lower low. Negative divergence is when the indicators go down and the price of the stock or security climbs up making higher high. Both of these divergences are the signals of the major shift in the direction of the price. Hidden divergence is also same like standard divergence where the price of stock and an indicator move in opposite directions.
It informs about the time when a trend looks suitable to continue. However, regular divergence give notification to traders about time for a possible reversal, or alteration in the price direction and hidden divergence gives the notification about ahead of time for possible continuation of trend. Indication of uptrend is reflected in the graph, when the indicator makes lower lows and the price of the security makes higher lows. Moreover, downtrend is shown when the indicator makes higher highs and the price of the security makes lower highs.