InvestorQ : Do divergences work as an analytical tool in all conditions and can they also fail while giving trading signals?
Aditi Sharma made post

Do divergences work as an analytical tool in all conditions and can they also fail while giving trading signals?

Answer
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Aashna Tripathi answered.
1 year ago


At the outset, any technical tool can fail for a variety of reasons. It could range from not applying the tool properly to market conditions operating at the outliers. Divergences tend to work better in longer-term time frames than in shorter-term ones, as trends are more visible on those charts. That is something you need to keep in mind. Apart from that, there are also some requirements that must be fulfilled before trading a valid divergence. For one, successive highs and lows must be connected. You must also make sure that the highs or lows on the price are vertically aligned with the highs or lows in the technical indicator. In the absence of fulfilling these 2 conditions, your analysis and interpretation of divergences can go wrong.

Then there is the role of chance and adverse market conditions that plays a key role in the success or otherwise of divergence. There are some instances when divergence fails and you simply have to be prepared with a good risk management strategy in such cases. To lessen the odds of this happening to you though, you can actually consider a multiple time frame analysis, which can be instrumental in reducing your risk further.