Divergence - Forex Forum

Hi,
It is often held that Divergence is an early indication of a directional change (even a trend change)
Can someone please explain how this is detected? Which indicators are efficient in indicating divergence?
Thank you

In the past I used the MACD divergence. But in real trading condition the divergences give a lot of false indications.
It's much easy to interpret the divergence after the movement.

ex. on GBPJPY we had a daily divergence between Nov 2008 and Jan 2009. During this period the price didn't stop the downtrend.

Yeah I agree with Arnaud Jeulin
Moving Average Convergence/Divergence is the next trend-following dynamic indicator. It indicates the correlation between two price moving averages.
The Moving Average Convergence/Divergence Technical Indicator is the difference between a 26-period and 12-period Exponential Moving Average (EMA). In order to clearly show buy/sell opportunities, a so-called signal line (9-period indicators` moving average) is plotted on the MACD chart.
The MACD proves most effective in wide-swinging trading markets. There are three popular ways to use the Moving Average Convergence/Divergence: crossovers, overbought/oversold conditions, and divergences.
Crossovers
The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the Moving Average Convergence/Divergence rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero.
Overbought/oversold conditions
The MACD is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels.
Divergence
An indication that an end to the current trend may be near occurs when the MACD diverges from the security. A bullish divergence occurs when the Moving Average Convergence/Divergence indicator is making new highs while prices fail to reach new highs. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.
Calculation of MACD
The MACD is calculated by subtracting the value of a 26-period exponential moving average from a 12-period exponential moving average. A 9-period dotted simple moving average of the MACD (the signal line) is then plotted on top of the MACD.
MACD = EMA(CLOSE, 12)-EMA(CLOSE, 26)
SIGNAL = SMA (MACD, 9)


This post has been edited by vik macks: Feb 25 2009, 17:34

MACD is efficient in wide-swinging trading markets.

Divergence is sometimes more easily recognised by changing the settings of the indicator eg Macd 7 10 5

A trader can also use CCI or stochastics to spot divergences...... or Rate of Change....

Divergence is not necessarily going to point out the entry......... but It will give you an idea as to what may be coming in the future.