Divergences Need Price Confirmation


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Divergences visible on technical indicators often provide useful advance information of corrections or rallies. Usually, indications are more reliable when divergences occur inside overbought or oversold zones of indicators.

A negative divergence occurs when an index or stock touches a higher top while a technical indicator touches a lower top. That itself may not be an immediate sell signal.

A sell signal occurs when a technical indicator corrects from its overbought zone. A better sell signal occurs when the indicator drops below its neutral zone (viz. ‘0’ line for MACD/ROC and 50% level for RSI/Stochastic). 

A positive divergence occurs when an index or stock touches a lower bottom while a technical indicator touches a higher bottom. That may not be an immediate buy signal.

A buy signal occurs when an indicator emerges from its oversold zone. A better buy signal occurs when the indicator moves above its neutral zone.

Divergence confirmation from several technical indicators are preferable. Investors should also await price/volume confirmation before taking any buy/sell decision.

Technical indicators of global stock indices showed positive divergences last week. Pullback rallies have followed.

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