Like mentioned on the previous sub chapter when you look for a divergence you are looking for different move price and indicator/oscillator make. If one is rising, the other one should fall. And the opposite is very much true. If one is falling, the other one should rise. And this is being called price diverging from indicator/oscillator.
Now, there may be situations out there in which you identify a divergence, but price still moving in the “wrong”direction. Well, because they are so tricky, normally a trader should wait for confirmation after identifying a divergence. In other words, consider them to be an early sign a trend might be changing and a move in the opposite direction might be in cards. However, until price actually changes direction we still may have fake moves as stops are hunted all the time especially on the currency market. This is where confirmation comes in place.
As mentioned previously, one of the most used oscillator for identifying divergences is the relative strength index (rsi) and it is widely spread the belief that a divergence based on this oscillator is extremely powerful. Under this chapter will look at different divergences based on the relative strength index, DeMark oscillator and commodity channel index (cci) to see what kind of divergences can be identified and how to use them. Will also introduce the concept of confirmation after a divergence being found.
Next chapter deals with channel surfing and there I will show you step by step a strategy that allows you to build your own channel and find important support and resistance areas based on your channel.