Divergence occurs when a financial security’s price displays deviation from the indicator you might see on your chart.
For example, a specific technical indicator might indicate bullish trading conditions, but the price is falling. Alternatively, the indicator might be showing bearish signals, but the price is rising. Price is moving in the opposite direction to the trade direction the indicators are suggesting.
Market divergence can be defined as the disagreement between price and indicators, and this deviation may have implications on how traders manage their market positions.
Traders might recognize the following scenarios: a divergence pattern becomes visible as the market price makes new highs, but the indicator doesn’t suggest remaining in or opening a long position. Alternatively, divergence becomes evident in downtrends when the market price makes a new low, but the technical indicator doesn’t suggest remaining in or opening a short position.
Divergence trading strategies are popular because market divergence can be a leading indicator of sentiment change. A divergent market could be a warning that change is imminent. Accordingly, traders might enter or exit their positions or adjust their stops.