A divergence forms on the chart when price makes a better high, but the indicator one is using makes a lower high. When the indicator and price action are out of sync it means that something is happening on your charts that require your attention and it’s not as obvious by just looking at your price charts.
It is vital to understand when a trend is slowing down. Less momentum does not always lead to a reversal, but it does signal something is changing, and the trend may consolidate or reverse.
Price momentum is measured by the length of short-term price swings—steep slopes and a long price swing represent strong momentum, while weak momentum is represented by a shallow slope and short price swing.
Momentum indicators consist of the relative strength index, stochastics, and the rate of change.
Divergence is the disagreement between indicator and can have major implications for trade management.
A divergence exists when the indicator does not agree with price action. Granted, this is often very basic and that we will now explore more advanced divergence concepts and see the way to trade them, but it is important to create a solid foundation.