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Course: Technical indicators

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Divergences

Divergences are a type of technical analysis tool that is used to identify potential trend reversals. Divergences occur when there is a discrepancy between the movement of the price of an asset and the movement of a technical indicator, such as an oscillator.

There are two types of divergences: bullish divergences and bearish divergences.

  • Bullish divergences occur when the price of an asset is making lower lows, but the technical indicator is making higher lows. This suggests that the downward momentum of the asset is waning, and there may be a potential trend reversal from bearish to bullish.
  • Bearish divergences occur when the price of an asset is making higher highs, but the technical indicator is making lower highs. This suggests that the upward momentum of the asset is waning, and there may be a potential trend reversal from bullish to bearish.

Divergences should not be used as standalone signals for making investment decisions, but rather as additional confirmation of other technical or fundamental signals. The lesson shows the different types of divergences and their correct illustration.

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