KCM Trading Platform Popular Science: What are the deviation indicators? How to distinguish between positive and negative deviations?

A divergence indicator is an inconsistency or divergence between a price action and a technical indicator. This inconsistency may indicate a weakening or shift in market trends and become a possible trading signal. It can be divided into two types, positive divergence and negative divergence.

We all know that in financial marekt, whether it is buying or selling, short or long, you need to follow the market trend. Only by following the trend can you get a certain profit. But sometimes you find that when the market price has been rising, some indicators show the opposite state. This is actually a typical deviation situation, and investors need to understand these deviation indicators thoroughly in order to better cope with market changes. TodayKCM Trading PlatformLet me introduce you in detail.

positive deviation

A positive divergence, also known as a bottom divergence, occurs when prices form a new low, but technical indicators do not form a new low; or when technical indicators form a higher high, while prices form a new low. When prices create a new low, such as in a downtrend, investors expect the relevant technical indicators to also create a new low to confirm the strength of the trend. However, a bottom divergence can occur if technical indicators do not follow prices to form a new low, but instead show some weakening. A bottom divergence can occur if the technical indicator's high gradually rises, showing a relative strength, while prices form a new low. This situation is also considered a bottom divergence, as the relative strength of technical indicators may signal the possibility of a price reversal.

Negative deviation

A negative divergence, also known as a top divergence, occurs when the price forms a new high, but the technical indicator does not form a new high, or when the technical indicator forms a lower low, while the price forms a new high. When the price creates a new high, such as in an uptrend, investors expect the relevant technical indicator to also create a new high to confirm the strength of the trend. However, if the technical indicator does not follow the price to form a new high, but instead shows some degree of weakening, a top divergence can occur. When the technical indicator's low gradually rises, showing a relative strength, while the price forms a new high. This situation is also considered a top divergence, as the relative strength of the technical indicator may indicate the possibility of a price reversal.

What are the deviation indicators?

Common divergence indicators are mainly MACD, KDJ, and RSI.

The Moving Average Indicator (MACD) is a trend-following and momentum indicator. A MACD divergence occurs when price action forms a new high or low, and the MACD indicator fails to confirm this new high or low. This inconsistency may suggest a potential trend reversal or trend weakening, which is divided into a top divergence and a bottom divergence. A top divergence occurs at the same time that the price forms a new high. The MACD indicator fails to form a new high and instead forms a relatively low high. It may suggest a weakening of buying pressure in the market. Although the price is rising, the buyer's momentum is weakened, and there may be a selling opportunity. A bottom divergence occurs at the same time that the price forms a new low. The MACD indicator fails to form a new low and instead forms a relatively high low. It may suggest that the selling pressure in the market is weakening, even though prices are falling, but the seller's momentum is weakening, and a buying opportunity may emerge.

The stochastic indicator (KDJ) is also an indicator that measures whether the market is overbought or oversold. A divergence occurs when the price forms a new high or low, but the stochastic indicator fails to confirm this new high or low. Refers to the inconsistency between the price movement and the movement of the KDJ indicator, indicating a potential trend reversal or trend weakening. Its patterns can be divided into top and bottom divergences.

Bottom divergence occurs at the same time that the price forms a new low. The KDJ indicator fails to form a new low, but instead forms a relatively high low. Means that the seller's momentum is weakened, and although the price is falling, the selling pressure is relatively small, which may suggest the possibility of a price reversal. Top divergence occurs at the same time that the price forms a new high. The KDJ indicator fails to form a new high, but forms a relatively low high. Means that the buyer's momentum is weakened, and although the price is rising, the buying pressure is relatively small, which may indicate the possibility of a price reversal.

The Relative Strength Indicator (RSI) measures how much the price has risen or fallen over a certain period of time and is used to judge whether the market is overbought or oversold. RSI divergence occurs when the price makes a new high or low, but the RSI fails to confirm this new high or low. This inconsistency may indicate a potential trend reversal or trend weakening, and there are two forms of top and bottom divergence. Top divergence occurs at the same time that the price forms a new high. The RSI indicator fails to form a new high, but forms a relatively low high. This indicates that the buyer's momentum has weakened. Although the price is rising, the buyer's momentum is relatively small, which may indicate the possibility of a price reversal. Bottom divergence occurs at the same time that the price forms a new low. The RSI indicator fails to form a new low, but instead forms a relatively high low. This suggests weaker seller momentum, and while prices are falling, there is relatively little selling pressure, which could signal the possibility of a price reversal.

It is important to note that neither a positive divergence from a top nor a bottom divergence is an absolute trend reversal signal, but a possibility. It requires a combination of other technical analysis tools and trend confirmation tools to increase the accuracy of trading decisions.

When using the technical analysis of the divergence indicator, the following points need to be noted: The divergence signal is not an absolute trend reversal signal, but a possibility. It is best used in conjunction with other technical analysis tools and trend confirmation tools to increase accuracy. Its interpretation may vary depending on market conditions and time periods, to be analyzed on a case-by-case basis. For short-term traders and day traders, the divergence signal may be more important. While for long-term investors, other factors also need to be considered.