InvestorQ : Are there various types of divergences or are all divergences of one type only?
Mahima Roy made post

Are there various types of divergences or are all divergences of one type only?

Answer
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Aditi Sharma answered.
1 year ago


From a trader’s relevance perspective, it will be possible to group these trading divergences into two main categories: regular and hidden. What exactly are these regular and hidden divergences? Let us look at some key takeaways of these types of divergences and their implications for your trading action.

· A regular divergence suggests a reversal in price action. In the midst of an uptrend, price usually makes higher highs but once the technical indicator shows lower highs, it could mean that the trend is about to turn. This is an important signal for the trader to tweak the trading strategy accordingly.

· Let us look at a downtrend scenario in the markets. In a downtrend, price usually makes lower lows but once the technical indicator draws higher lows, it might be a sign that the trend is almost over. Then you either need to play shorts only with strict stop losses or you need to change you view in the market from the short side to the long side.

· The above two points referred to visible divergences, which are relatively to decipher and also to interpret. Let us now shift to the second category of hidden divergences. A hidden divergence indicates that the current trend is likely to resume. Let us start with the case of an uptrend first. In an uptrend, price usually makes higher lows but when the technical indicator starts making lower lows in a pullback, it could be a sign that the correction is over and that the previous trend could resume. This is an important turning point to identify and initiate your trade.

· Let us look at the other dimension of the hidden trend. In a downtrend, price tends to make lower highs but once the technical indicator draws higher highs in a retracement, it could be a signal that the pullback is over and that the previous downtrend could carry on. That is a hidden signal to either hedge your position or initiate fresh shorts in the market to make the best of the sustained downtrend.