In trading, there is an important term, divergence. This term is divided into two, namely bullish and bearish divergence.
For traders, it is important to know the definition and ins and outs of divergence, because it will guide you to make your trading move.
Find out more about divergence and its types in the full review below.
Bearish Divergence: What is it?
Basically, a divergence is an asset price trend that disagrees with the actual price movement, which is often seen as a warning to traders about the assets they own.
A divergence can indicate prices are weakening or strengthening in an instant. As mentioned above, the divergence pattern is divided into 2 types, namely bearish and bullish.
Technical traders often monitor this pattern because it will notify traders of potential changes in their asset prices.
Divergence In Trading
Traders will use oscillator indicators to detect divergence in trading. Oscillators are designed to show traders a rise and fall in prices. In this case, the indicators that are commonly used are MACD, RSI, and Stochastic.
All indicators on the trade will see an ongoing trend in asset prices. On the other hand, the up and down pattern in the divergence will signal the time to sell/buy an asset.
However, divergence is often a sign that traders should delay making decisions. It is possible that the emerging pattern will continue for a longer period of time.
Advantages of Trading with Divergence — Bearish Divergence
- As a technical analysis reference
For technical traders, they will usually read divergence patterns as a reference, because every pattern that occurs signaled a changing trend in the market.
- Helping traders take the next step
If we already know the trend that likely occurs, traders can decide the next step they need to take.
In this case, a trend showing a decline can be used as an indicator to buy the asset immediately as it probably helps you earn money at a later date.
- Beginners’ friendly for both traders and investors
Beginners, both traders and investors will fairly easy to learn this technical analysis and use it to their advantage. They only need to monitor a change in trend to predict a reversal in the asset value.
- Applicable to stocks, forex and crypto
Divergence is a pattern that can be used or applied by traders in various investment assets, including stocks, forex, and crypto. You only need to adjust to the trends that occur in each asset.
Disadvantages of Trading with Divergence
- Not the only reference
Basically, divergence is not the only reference that can determine market conditions. In this case, you should look for additional references to be certain about market trends.
- The occurred pattern is not necessarily the same as in theory
Sometimes, ups and downs of price trends occur continuously without any reversal. In a sense, the pattern that occurs is not always the same as in theory.
- It needs a long time to see change in patterns
It takes a long time to see change in patterns, thus, divergence cannot be used for day trading.
- There is no definite time when the reversal will occur
There is no definite time when the trend, both bullish or bearish, will reverse. It could be a hidden bearish divergence that occurs that will take a while for reversal.
This pattern occurs when prices are at higher highs, while the oscillator indicator is at lower highs, which means that the asset’s value is set a new high on the chart.
This pattern indicates a change of trend, from rising to falling so quickly. When such a repeating pattern occurs, the bearish movement will accelerate.
In bullish divergence, a negative trend is ready to reverse direction. The asset value condition shows a new low, while the indicator has yet to reach a new low.
Bullish divergence is a signal that the asset will experience a weakening trend. This is a good time to increase the assets because there is a possibility that a rapid upward trend will emerge.
Trading Tips With Divergence
- Upgrade your knowledge regularly
First, you have to regularly learn a lot of things and monitor the market conditions. Then, do an analysis of the ongoing trend and its changes.
- Make sure to take the right steps
You must make the right calculation at the right time. Even though it seems risky, sometimes you just have to take the risk.
- Stop-loss is an option
The asset value may continue to decline and in this case, you must immediately make a stop loss. You must know for sure the limit of loss that you would compromise so that you could minimize your loss.
- Set profit target
Last but not least, set a reasonable profit target. If you have earned a decent profit you can immediately sell your assets.
That’s a review about bearish divergence that you need to know. Also check out other articles about crypto assets, blockchain, and others only at Indodax Academy.