Divergence System

Included within this section are descriptions of the BirbicatorPRO's Divergence System and how it may be applied to varying types of traders.

Divergence System

What are Divergences?

Divergence is when the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator, or is moving contrary to other data. Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction.

There is positive and negative divergence. Positive divergence indicates a move higher in the price of the asset is possible. Negative divergence signals that a move lower in the asset is possible.

Divergence Score

While BirbicatorPRO's divergence system will create and mark divergences on the primary chart, connecting the candles that are generating the divergence as well as their direction, BirbicatorPRO's dashboard will also in real-time provide the running divergence score that is continually being calculated. This function provides a user with granular resolution in terms of identifying potential reversals based on 10 separate indicators where divergences are building.

Refer to the "BirbicatorPRO Dashboard" section for more information.

BirbicatorPRO incorporates several base indicators used by a majority of traders as a way to measure divergences as part of the BirbicatorPRO Divergence System.

The Divergence System is based on 10 well-known indicators:

  • Relative Strength Index (RSI)

  • Money Flow Index (MFI)

  • MACD

  • Momentum

  • Commodity Channel Index (CCI)

  • On-Balance Volume (OBV)

  • Stochastics (STOCH)

  • Volume Weighted Moving Average (VWMA)

  • Chaikin Money Flow (CMF)

  • Directional Movement (DM)

Using the to indicators together, BirbicatorPRO provides an index score of the divergences occurring within the above indicators and automatically presents the "offending" candles on the chart.

Bear divergences occur above the current candle and bull divergences occur below the current candle.

Divergence Minimum Score

The user is able to filter divergences based on the calculated index score of the divergence within BirbicatorPRO's options menu.

Filtering the divergences based on the score provides the user with the ability to focus only on those divergences that are confluent among a greater number of core indicators that BirbicatorPRO tracks. The goal of using a higher minimum divergence score is to observe the "strongest" possible divergences which provide a higher degree of certainty of resolution (reversal).

The following example illustrates the differences between selecting a value of 10% vs. a value of 75%.

NOTE: The default value for "Minimum Divergence Score" is set to 50%

Minimum Divergence Score set to 10%
Minimum Divergence Score set to 75%

Limitations of Divergences

As is true with all forms of technical analysis, users should use a combination of analysis and analysis techniques to confirm a trend reversal before acting on divergence alone. Divergence will not be present for all price reversals, therefore, some other form of risk control or analysis needs to be used in conjunction with divergence.

Also, when divergence does occur, it doesn't mean the price will reverse or that a reversal will occur soon. Divergence can last a long time, so acting on it alone could be mean substantial losses if the price doesn't react as expected. [Investopedia]