Divergence Indicators

A divergence occurs when the trend of a security's price

doesn't agree with the trend of an indicator.

Many of the examples in subsequent chapters (see page )

demonstrate divergences.

The chart in Figure 34 shows a divergence between Whirlpool

and its 14-day CCI (Commodity Channel Index). [See page .]

Whirlpool's prices were making new highs while the CCI

was failing to make new highs. When divergences occur,

prices usually change direction to confirm the trend

of the indicator as shown in Figure 34. This occurs

because indicators are better at gauging price trends

than the prices themselves.

A indication that an end to the current trend may be

near occurs when the MACD diverges from the security.

A bearish divergence occurs when the MACD is making

new lows while prices fail to reach new lows. A bullish

divergence occurs when the MACD is making new highs

while prices fail to reach new highs. Both of these

divergences are most significant when they occur

at relatively overbought/oversold levels.

Look for divergence between the indicator and the price action.

If the price trends higher and the MFI trends lower (or vice versa),

a reversal may be imminent.

Divergences between the Accumulation/Distribution and

the security's price imply a change is imminent.

When a divergence does occur, prices usually change

to confirm the Accumulation/Distribution. For example,

if the indicator is moving up and the security's price is

going down, prices will probably reverse.

The Average True Range ("ATR") is a measure of volatility.

The Average True Range can be interpreted using

the same techniques that are used with the other

volatility indicators. Refer to the discussion on

Standard Deviation for additional information on

volatility interpretation.

(was developed by Donald Lambert)

A divergence occurs when the security's prices are

making new highs while the CCI is failing to surpass its

previous highs. This classic divergence is usually

followed by a correction in the security's price.

The interpretation of the Momentum indicator is

identical to the interpretation of the Price ROC.

Both indicators display the rate-of-change of a security's price.

However, the Price ROC indicator displays

the rate-of-change as a percentage whereas

the Momentum indicator displays the rate-of-change as a ratio.

As a market peaks, the Momentum indicator will climb sharply

and then fall off-- diverging from the continued upward or sideways movement of the price. Similarly, at a market bottom,

Momentum will drop sharply and then begin to climb

well ahead of prices. Both of these situations result in

divergences between the indicator and prices.

The Relative Strength Index ("RSI") is a popular oscillator.

It was first introduced by Welles Wilder in an article in

Commodities (now known as Futures) Magazine in June, 1978.

Step-by-step instructions on calculating and interpreting

the RSI are also provided in Mr. Wilder's book, New Concepts in Technical Trading Systems.

The RSI is a price-following oscillator that ranges

between 0 and 100. A popular method of analyzing

the RSI is to look for a divergence in which the security is

making a new high, but the RSI is failing to surpass its previous high.

This divergence is an indication of an impending reversal.

When the RSI then turns down and falls below

its most recent trough, it is said to have completed

a "failure swing." The failure swing is considered

a confirmation of the impending reversal.

As discussed above, divergences occur when

the price makes a new high (or low) that is not confirmed

by a new high (or low) in the RSI. Prices usually correct

and move in the direction of the RSI.

Sto.chas.tic (sto kas'tik) adj. 2. Math. designating a process

having an infinite progression of jointly distributed random variables.

Look for divergences. For example, where prices are making

a series of new highs and the Stochastic Oscillator is failing

to surpass its previous highs.

TRIX is a momentum indicator that displays the percent

rate-of-change of a triple exponentially smoothed

moving average of the security's closing price.

Divergences between the security and the TRIX can

also help identify turning points.

MACD lines (moving average convergence divergence lines) -

a technical stock indicator that uses a fast and

a slowmoving average to determine when price

up-trends and down-trends are beginning and ending.

european:
Anybody knows good MQ4 divergence indicators (RSI, MACD or CCI) ?

drgoodvibe:
Bill, now that's exactly how a divergence indicator should be! I'd be willing to donate to a fund to release that puppy to the community.. Though, I wish it could be possible that the divergence indicator could use any indicator to plot divergences..