what does divergence tell you
divergence in technical analysis may signal a major positive or negative price move a positive divergence occurs when the price of an asset makes a new low while an indicator such as money flow starts to climb conversely a negative divergence is when the price makes a new high but the indicator being analyzed makes a lower high traders use divergence to assess the underlying momentum in the price of an asset and for assessing the likelihood of a price reversal for example investors can plot oscillators like the relative strength index rsi on a price chart if the stock is rising and making new highs ideally the rsi is reaching new highs as well if the stock is making new highs but the rsi starts making lower highs this warns the price uptrend may be weakening this is negative divergence the trader can then determine if they want to exit the position or set a stop loss in case the price starts to decline positive divergence is the opposite situation imagine the price of a stock is making new lows while the rsi makes higher lows with each swing in the stock price investors may conclude that the lower lows in the stock price are losing their downward momentum and a trend reversal may soon follow divergence is one of the common uses of many technical indicators primarily the oscillators the difference between divergence and confirmationdivergence is when the price and indicator are telling the trader different things confirmation is when the indicator and price or multiple indicators are telling the trader the same thing ideally traders want confirmation to enter trades and while in trades if the price is moving up they want their indicators to signal that the price move is likely to continue limitations of using divergenceas is true with all forms of technical analysis investors should use a combination of indicators and analysis techniques to confirm a trend reversal before acting on divergence alone divergence will not be present for all price reversals therefore some other form of risk control or analysis needs to be used in conjunction with divergence also when divergence does occur it doesn t mean the price will reverse or that a reversal will occur soon divergence can last a long time so acting on it alone could be mean substantial losses if the price doesn t react as expected 