As we know, divergence represents a chart pattern when an asset’s price moves in the opposite direction of an oscillator.
Most traders use indicators to know more about the divergences as they tell you about the possible trends and their strength and possible reversals. Most indicators highlight divergences with the help of peaks and troughs. These are created on the price charts along with a series of similar highs and lows. You can expect a possible reversal when the indicator is unable to imitate the price chart pattern. It also indicates that the trend might be weak.
If there is an uptrend, and the price reaches a new high, the indicator cannot do so; the divergence is bearish. If there is a downtrend and the price reaches a new low, but the indicator cannot do so, the divergence is bullish.
However, except for bullish and bearish divergence, there is one more – triple divergence.
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What is a triple divergence?
Triple divergence represents a false divergence signal when the price makes a new and higher high (during an uptrend) or a lower low (during a downtrend ). Still, the direction does not reverse after three attempts.
For example, a triple bearish divergence has three times in a row false bearish reversal:
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Triple divergence should not be considered when the trend is fragile, and when:
- When the price and indicator, respectively, make an equal High and a lower High.
- When the price and the indicator make an equal Low and a Higher Low.
- When both the price and the indicator make an equal High
- When both the price and the indicator make an equal Low
- The difference in the height of peaks and troughs is almost negligible.
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Conclusion
All these trading signals are important and work differently when it comes to creating trading strategies. Different traders use different indicators. Do keep in mind that using a single indicator can cause more harm than good. It is better to use at least three complementary indicators at one.
