Updated Jun 25, Divergence vs. In the world of finance and trading, convergence and divergence are terms used to describe the directional relationship of two trends, prices, or indicators.
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Convergence Most traders refer to a convergence when describing the price action of a futures contract. Here, convergence describes the phenomenon of the futures price and the cash price of the underlying commodity moving closer together over time.
Moving Average Convergence Divergence (MACD)
Convergence happens because, theoretically, an efficient market will not allow something to trade for two prices at the same time. The actual market value of a futures contract is lower than the contract price at issue because traders have to factor for the time value of the security. As the expiration date on the convergence trading signals approaches, the premium on the time value shrinks and the two prices converge.
If the prices did not converge, traders would take advantage convergence trading signals the price difference to make a quick profit. This would continue until prices converged.
In the following chart, you can see how the two EMAs applied to the price chart correspond to the MACD blue crossing above or below its baseline dashed in the indicator below the price chart. The RSI is an oscillator that calculates average price gains and losses over a given period of time. The default time period is 14 periods with values bounded from 0 to
When prices do not converge, there is an opportunity for arbitrage. Arbitrage is when an asset is bought and sold at the same time, in different markets, to take advantage of a temporary price difference.
Although it is an oscillator, it is not typically used to identify over bought or oversold conditions. It appears on the chart as two lines which oscillate without boundaries. The crossover of the two lines give trading signals similar to a two moving average system. How this indicator works MACD crossing above zero is considered bullish, while crossing below zero is bearish. Secondly, when MACD turns up from below zero it is considered bullish.
Arbitrage takes advantage of inefficiencies in the market. In technical analysis, however, convergence occurs when the price of an asset, indicator, or index moves in the same direction as a related asset, indicator, or index.
Divergence Divergence is the opposite of convergence. When the value of an asset, indicator, or index moves, the related asset, indicator, or index moves in the other direction.
Convergence As Confirmation
Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction. Technical traders are much more concerned with divergence than convergence, largely because convergence is assumed in a normal market. Divergence is interpreted to mean that a trend is weak or potentially unsustainable. Traders use divergence to get a read on the underlying momentum of an asset.
The MACD collects data from different moving averages to help traders identify possible opportunities around support and resistance levels.
Divergence can be positive or negative. For example, a positive divergence would occur if a stock is nearing a low but its indicators start to rally.
This would be a sign of trend reversal, potentially opening up an entry opportunity for the trader. When divergence does occur, it does not mean the price will reverse or that a reversal will occur soon.
Moving average convergence/divergence (MACD) definition
Divergence can last a long time, so acting on it alone could be mean substantial losses if the price does not react as expected. Key Convergence trading signals Convergence is when the price of an asset and an indicator move toward each other.
The absence of convergence is an opportunity for arbitrage. Divergence is when the price of an asset and an indicator move away from each other. Technical traders are more interested in divergence as a signal to trade. Compare Accounts.