When divergence lies
In a strong trend divergence can hold for months. On its own it is not a signal.
When divergence lies — what it is?
Divergence does not work in a strong trend. While the move continues, the disagreement can hold for weeks and renew at every extreme.
The reason is in how the indicator is built: it normalises the strength of the move against the recent past. In a prolonged trend each new push is compared with an ever faster background.
Hence a rule worth learning before divergence itself: it shows that the impulse is weakening, but it does not say that the impulse is over.
When divergence lies — how it is built?
Divergence only counts as having played out after a break in structure. Before the CHoCH it is an observation, not a signal. If divergence builds up for a third time in a row without a break, the trend is stronger than the indicator, and you should be trading with the trend.
When divergence lies — common mistakes
Selling a strong trend because "this is the third divergence already".
Adding to a position against the move, citing the indicator.
Hunting for divergence on every swing.
Treating a divergence that did not play out as an indicator error: it shows exactly what it is supposed to.
Related to
Glossary
- divergence
- price and the indicator pointing in different directions.
- trend
- a steady directional move in price.
- indicator
- a calculation based on price or volume, drawn on the chart.
- impulse
- a fast directional move with large candles.
- change of character
- the first close **against** the trend. It points to a possible reversal.
- position
- an open trade.