RSI has fixed boundaries with values ranging from 0 to For each upswing in price, there is a similar upswing in RSI. When price swings down, RSI also swings down.
Figure 2: Indicator swings generally follow the direction of price swings A. Trendlines can be drawn on swing highs B and lows C to compare the momentum between price and the indicator. Disagreement between the indicator and price is called divergence, and it can have significant implications for trade management.
For this article, the discussion is limited to the basic forms of divergence. It is important to note there must be price swings of sufficient strength to make momentum analysis valid. Therefore, momentum is useful in active trends, but it is not useful in range conditions in which price swings are limited and variable, as shown in Figure 4.
Figure 4: In range conditions, the indicator does not add to what we see from price alone. Variable pivot highs and lows show range. In a downtrend, divergence occurs when price makes a lower low, but the indicator does not. When divergence is spotted, there is a higher probability of a price retracement. Figure 5 is an example of divergence and not a reversal, but a change of trend direction to sideways.
Figure 5: Momentum divergence and a pullback. Higher pivot highs small orange arrows signal price support. Divergence helps the trader recognize and react appropriately to a change in price action. It tells us something is changing and the trader must make a decision, such as tighten the stop-loss or take profit. Seeing divergence increases profitability by alerting the trader to protect profits.
Technical traders generally use divergence when the price moves in the opposite direction of a technical indicator. The chart in Figure 6 below shows trends do not reverse quickly, or even often. Therefore, we make the best profits when we understand trend momentum and use it for the right strategy at the right time. Figure 6: Trend continuation.
Agreement between price and the indicator give an entry small green arrows. Divergence is important for trade management. In Figure 5, taking profit or selling a call option were fine strategies. The signal to enter appeared when the higher low in price agreed with the higher low of the indicator in Figure 6 small green arrows.
Divergence indicates something is changing, but it does not mean the trend will reverse. It signals the trader must consider strategy options—holding, selling a covered call , tightening the stop, or taking partial profits. The glamour of wanting to pick the top or bottom is more about ego than profits. So we'll put some water molecules or dots to represent a small sample of the water molecules throughout space here and then I'm just gonna let it play where each one moves along the vector that it's closest to.
I'll just let it play forward here where each one is flowing along the vector that's touching the point where it is in that moment.
Divergence Definition and Uses
So for example, if we were to go back and maybe focus our attention on just one vector like this guy, one particle, excuse me, he's attached to this vector so he'll be moving in that direction but just for an instant because after he moves a little he'll be attached to a different vector. So if you kind of let it play and follow that particular dot after a little bit you'll find him elsewhere. I think this is the one, right.
Now he's gonna be moving along this vector or whatever one is really attached to him. Thinking about all of the particles all at once doing this gives a sort of global view of the vector field. If you're studying math, you might start to ask some natural questions about the nature of that fluid flow. For example, you might wonder if you were to just look in a certain region and count the number of water molecules that are inside that region, does that count of yours change as you play this animation, as you let this flow over time? In this particular example you can look and it doesn't look like the count changes.
Certainly not that much. It's not increasing over time or decreasing over time In a little bit, if I gave you the function that determines this vector field, you will be able to tell me why it's the case that the number of molecules in that region doesn't tend to change but if you were to look at another example, like a guy that looks like this and if I were to say I want you to focus on what happens around the origin, in that little region around the origin, you can probably predict how once I start playing it, once I put some water molecules in there and let them flow along the vectors that they flow along, the density inside that region around the origin decreases.
So we put a whole bunch of vectors there and I'll just play it for a quick instant. Just kind of let it jump for an instant. One thing that characterizes this field around the origin is that decrease in density. What you might say if you wanted to be suggestive of the operation that I'm leading to here is that the water molecules tend to diverge away from the origin.
So the kind of divergence of the vector field near that origin is positive.
You'll see what I mean mathematically by that in the next couple videos, but if we were to flip over these vectors, right, if we were to flip them around, now if I were to ask about the density in that same region around the origin, we can probably see how it's gonna increase. When I play that fluid flow over just a short spurt of time, the density in the region increases. If all goes well there should be no disruption to the site but I felt it best to give notice just in case something unexpected happens.
Before we can get into surface integrals we need to get some introductory material out of the way. That is the purpose of the first two sections of this chapter. In this section we are going to introduce the concepts of the curl and the divergence of a vector. There is another potentially easier definition of the curl of a vector field.
This is defined to be,.
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Note as well that when we look at it in this light we simply get the gradient vector. Next, we should talk about a physical interpretation of the curl. The divergence can be defined in terms of the following dot product.