Divergence is a common measure of market momentum, but how useful is it? Divergences on their own are dangerous signals but when used in conjunction with price they become a powerful tool to add to your trading arsenal. Understanding momentum is key. The example below shows a strong upward trend by TPG Telecom interspersed with corrections. The divergence during 2015 by the momentum indicator was a warning but was unconfirmed by price which has since maintained it upward trend and in fact recently broken higher. Don’t let inaccurate analysis and common market ‘adages” mislead you. There are right ways and wrong ways to use momentum. In essence there are two simple rules to live by. Price is king and the trend is your friend.
It my Radar Newsletter next week I discuss this indicator in more detail and a very simple way to use it effectively and profitably.