Bullish divergence

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Bullish divergence
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Bullish divergence a situation in which an indicator reveals a likely bullish move but price trends downward[1] Persistent discrepancies are in fact the opposite of bearish signals. Despite their easy application and general information power, commercial oscillators are usually misunderstood in the commercial industry, given their close relationship with momentum. At the most basic level, momentum is actually a way of assessing the relative level of greed or fear on the market at any given time.

Exhaustion a momentum leading to trend reversals

The most reliable trade signal form RSI (relative strength index) comprises divergence, which technically signals the end of a trend. A divergence manifests in the case that RSI does not move in the same direction as that of the market. Divergence is highly helpful to give out-trend reversals. There are two types of divergence:

  • bullish divergence and
  • bearish divergence.

The first feature (bullish/bearish) state of the divergence relates to the RSI (relative strength index). For instance, a bullish divergence means rising RSI while prices are falling. A bullish divergence occurs when there is a clear downtrend in the market price of the asset while the RSI starts to increase; showing a clear reversal in the trend to drift up. Under bullish divergence, the trading strategy is to buy. A bearish divergence manifests when there is a clear uptrend in the market while the RSI starts to decrease; showing a clear reversal in the trend to move down. Under bearish divergence, the trading strategy is to sell[2]

Bullish and bearish Divergences Give the strongest buy signals: Divergences between RSI and price do not give the strongest buy and sell signals although these tend to occur at major tops and bottoms. They show up when the trend is weak and ready to reverse. While this is theoretically true, in actual fact it is very difficult to trade divergences. The reason for this is that the market continues to move up long after the bearish divergence s visible on the charts. So, too, is the case with a bullish divergence. What these divergences help in is providing a warning signal that the trend is weakening. Accordingly, at such Times stops need to be tightened and profits protected[3].

Bearish divergence a situation in which an indicator reveals a likely bearish move but price trends upward[4].

Triple bullish or bearish divergences

These consist of three price tops and their oscillator tops, or their price bottoms and their oscillator bottoms, They are even stronger than the regular divergences. But again, do not buy based on divergence alone[5].

Bullish vs. bearish

Option investors will seek to establish positions based on their market attitude. Options investors are either bullish or bearish[6]:

  • Bullish - Investors who believe that a stock price will increase over time are said to be bullish. Investors who buy calls are bullish on the underlying stock. That is, they believe that the stock price will rise and have paid for the right to purchase the stock at a specific price known as the exercise price or strike price. An investor who has sold puts I also considered to be bullish on the stock. The seller of a put has an obligation to buy the stock and, therefore, believes that the stock price will rise.
  • Bearish – investors who believe that a stock price will decline are said to be bearish. The seller of a call has an obligation to sell the stock to the purchaser at a specified price and believes that the stock price will fall and is therefore bearish. The buyer of a put wants the price to drop so he or she can sell the stock at a higher price to the seller of the put contract. An investor who has bought puts I also considered to be bearish on the stock.

References

Footnotes

  1. C. Thomsett M. (2014), p. 279
  2. Ramlall I. (2016), p. 138
  3. Gujral A. (2016)
  4. C. Thomsett M. (2014),p. 279
  5. Gujral A. (2016)
  6. Wiley (2019), 203

Author: Sylwia Szrajber