Divergences in cryptocurrency! How to find? How to trade?

 

How to use divergences in technical analysis of cryptocurrency?  



 Surely you have come across this concept in the reviews of analysts and traders, but I am sure that you did not dig deep in this direction.

Everyone knows that divergences can be bearish and bullish, but how many types of divergences can you name?

 

The correct answer is three.

 

The term divergence is quite common and is used in mathematics, physics, biology, linguistics, but its essence is the same everywhere and comes from the Latin divergo - I deviate.

 

In technical analysis, divergence (or in the trading jargon - diversion) means the divergence of the direction of the indicator and the price chart.

The value of divergence in technical analysis lies in the fact that, unlike most signals, diversion is leading.

 

The essence of this signal is simple, if it appears, then there is a possibility of a trend change in the near future, or, at least, the market goes sideways.

 

Therefore, a bearish divergence will indicate a price reversal downward, and a bullish divergence will indicate a change in direction upward.

The divergence signal works on all timeframes, but, as with most signals, the law of subordination applies, and the divergence on a higher timeframe is stronger than on a lower one.

 

Speaking directly about the cue ball, in my practice I can say that the most suitable scale for catching diverters is 12 hours.

It's hard for me to explain why, but it is on it that these signals work most effectively.

 

To track down divergence signals, I use a whole set of oscillators at once, such as:

  • Chaikin oscillator
  • DeMarker
  • MACD
  • Stochastic
  • RSI
  • Volume Oscillator.

 

Why exactly they?

 

Because each of them is unique and has its own characteristics and sensitivity threshold in certain market conditions.

 

You can use any other oscillator with which you are most comfortable to work, my main task in this post is to tell you about the very nature of the “Divergence” signal and how to read it correctly on the chart.

 So, as I said, there are only three types of divergence, these are:

  • normal (against the trend),
  • hidden (trend following),
  • extended. 

Also, do not forget that divergence acts only until the next peak forms, after which it already loses its weight.


An example of a common divergence (against the trend)

 



In the chart above, we can see a good example of a common, Bearish divergence. This divergence is also called divergence against the trend.

The name itself contains the essence of this signal.

On the chart above, we can see that, despite the updating of historic highs within the bullish trend, the Chaikin, Volume, RSI oscillators show peaks below the previous ones.

 

For clarity, I marked this signal with blue arrows.

As can be seen from the history of the movement, this signal worked 100%, and the people who followed this signal left the market in time, selling their bits at historical highs.

 

in the case of a regular Bullish divergence, the signal works on the same principle, i.e. the indicator, even though the market updates the lows, will show more positive extremes.

 

An example of a hidden divergence (trend following)

 




In the chart above, we see a good example of reverse divergence, which is also called “hidden” or “trend following”.

 

Beginners often confuse bearish “hidden” with regular “bullish” divergence, which is why they make fatal mistakes and enter longs, when, on the contrary, it is necessary to consider the option with short positions.

 

In the chart above, on the DeMarker, MACD and RSI indicators, this insidious, BEAR hidden divergence is especially clearly visible.

Its essence is opposite to the usual diversion - here the oscillator updates its peaks when the price chart cannot do this.

 

As you can see, this signal also worked with a bang, and the market followed the signal and went into correction.

 

For a Bullish hidden divergence, the opposite is true - the indicator updates its lows when the price chart can no longer do this.


Extended divergence example

 

Extended divergence is often found during sideways market movements when there is no pile of highs and lows, as well as during the formation of a "double bottom" or "double top" pattern and serves as an excellent confirmation signal of a trend reversal.

 

In this case, you need to monitor what value the oscillator takes when it reaches the corridor wall in the sideways.





 In the chart above, we can see that the price has only reached the level of the previous minimum, while the volume oscillator and DeMarker have already deviated from the price chart and showed extremes at higher levels.

This signal is called an extended Bullish divergence.

Extended BEAR divergence follows the same rules and occurs when the highs are at the same level, but the oscillator failed to show re-reaching past values ​​and drew highs below the previous ones.

What now?

To objectively assess the situation and make an analysis for the presence of divergences, you need to view a trading instrument on all timeframes, from weekly to hourly


We see that the volume oscillator has already begun to renew its highs, despite the fact that the market is still going down.

However, other indicators do not give strong reversal signals.

And this means that the small pullback that is happening now may just be the result of those very single bursts of our volume oscillator.

At 6 o'clock, the picture is even more depressing.


As you can see in the chart above, we have a bearish diversion on Chaikin and Volumes, which is already a fairly serious bid for a corrective movement.


At four o'clock, the bearish sentiment is confirmed by DeMarker.

Since the search for divergences occurs when comparing the extremes on the price chart and indicators, for greater clarity I recommend using the Zig Zag, it highlights local extremes on the price chart, which makes analysis easier for a beginner.

At the same time, please do not forget that when looking for divergences in a bearish trend, we compare the lows, and in a bullish trend, the highs.

In this case, the divergences themselves should be considered only as a confirming, additional signal for your trading strategy.

Entering the market based on only a divergence signal is a big risk!

A good symbiosis of divergence analysis with trading strategies is an example of using this analysis when trading in a channel.

For an example, see the chart above.

Now the market is in a descending channel, and a bearish divergence at 4 o'clock indicates a small probability of breaking this channel upwards, therefore, on a rebound from the upper border of the channel, you can open short positions with the obligatory observance of risk management and setting stop-losses.

Good luck and good profits to everyone!

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