Price Divergence. Footprint

Divergence: How to Identify and Use Price Discrepancies

When traders discuss price discrepancies, Stochastic and MACD indicators often come to mind. The divergence between price and an indicator's readings is known as divergence.

In simple terms: if the current high on the chart is higher than the previous one, but the indicator shows a lower high, this signals divergence.

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What Is Behind Divergence?

From a mathematical perspective, divergence may seem counterintuitive. This happens because indicators "adapt" or adjust to market data. When this adjustment reveals a mismatch between price and the indicator, it is visualized as divergence on the chart.

To gain a deeper understanding of divergence, let’s activate the Footprint chart and add additional indicators such as Volume and Delta.

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Divergence on Footprint Charts

True divergence occurs when price moves up or down without confirmation from volumes.

Examples:

1. Divergence at Lows:

   • The price makes a new low, but volumes are lower than on previous candles.
   • This signals a decrease in selling activity, allowing buyers to potentially reverse the price direction.

2. Divergence at Highs:

   • The price reaches a new high, but volumes decline.
   • This indicates a reduction in buying activity, giving sellers the opportunity to push the price downward.

3. Divergence with Unchanged Volumes:

   • Both highs and lows increase, but volumes remain unchanged.
   • This also signals divergence, pointing to a weakening trend.

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How to Trade Divergence

Divergence is a powerful tool, but using it effectively requires patience. Here’s how you can approach it:

Strategy 1: Divergence at Lows

1. Identify divergence: the price makes a new low, but volumes are lower.
2. Wait for a minor correction in favor of buyers.
3. After confirming buyer activity, open a buy position.

Strategy 2: Divergence at Highs

1. Identify divergence: the price rises, but volumes decline.
2. Wait for a slight drop that benefits sellers.
3. After confirming seller activity, open a sell position.

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Benefits of Analyzing Divergence with Footprint Charts

1. Increased Accuracy:
   Analyzing volumes and delta provides insights into what’s happening within the candlestick.

2. Early Trend Reversal Detection:
   Divergence helps identify trend weakness before it fully reverses.

3. Simple Interpretation:
   Decreasing volumes alongside rising or falling prices offer clear signals for action.

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Conclusion

Divergence isn’t just a theoretical concept; it’s a practical tool that can help traders pinpoint precise market entry points. By leveraging the Footprint chart, along with complementary indicators like Volume and Delta, you can maximize the potential of market discrepancies.

 

The key to working with divergence is patience. Observe corrections, confirm your analysis, and enter trades only when the market provides a clear signal. By combining technique with discipline, you can use divergence to trade successfully!