Extended divergence
Price made two peaks at the same height, the indicator did not. An in-between case.
Extended divergence — what it is?
Extended divergence appears at equal or nearly equal extremes: price makes two roughly identical highs while the indicator drops noticeably.
The situation is telling. Equal extremes are EQH or EQL in themselves — a cluster of stops — and a weakening indicator says there is nothing left to carry the move on.
Two signs meeting in one place is not common, and that is exactly why it is valuable: the liquidity is marked out and there is no strength left to work it in the previous direction.
Extended divergence — how it is built?
The condition is that the extremes are roughly equal while the indicator's divergence is distinct. After that it is business as usual: wait for liquidity to be taken beyond the equal extremes and for confirmation from a shift in structure.
Extended divergence — common mistakes
Treating equal extremes as an exact figure: a small difference is fine.
Entering before liquidity beyond the extremes has been taken.
Looking for the pattern where the extremes differ noticeably: that is regular divergence already.
Doing without confirmation from structure.
Related to
Glossary
- divergence
- price and the indicator pointing in different directions.
- indicator
- a calculation based on price or volume, drawn on the chart.
- equal highs
- two or more highs at the same level. Orders pile up under and above them.
- equal lows
- the mirror construction.
- liquidity
- a cluster of pending orders and stops in a particular zone. The fuel for large capital to move.