In technical analysis, most indicators can give three different types of trading signals: crossing over a major signal line, crossing over a center line and indicator divergence.
Of these three signals, divergence is definitely the most complicated for the rookie trader. Divergence occurs when an indicator and the price of an asset are heading in opposite directions. Negative divergence happens when the price of a security is in an uptrend and a major indicator heads downward. Conversely, positive divergence occurs when the price is in a downtrend but an indicator starts to rise.
These are usually reliable signs that the price of an asset may be reversing. When using divergence to help make trading decisions, be aware that indicator divergence can occur over extended periods of time,so spotting divergences is very useful in determining long term trends and foreshadowing potential reversals. This eBook will help you grasp the concepts of indicator divergences and learn how to use them in both long-term analysis and day trading. 9 pages