Ask Colin

I am a little confused regarding where to place bearish/bullish divergence lines when comparing a price chart and an oscillator chart. When should the lines be shown on charts touching price peaks and on the oscillator touching oscillator peaks? And when should they be shown on the chart touching price troughs and oscillator troughs?

Here is some material on Divergences that I wrote a few years ago:

Concept of Divergence

It has been observed that momentum oscillators offer warning signals of changes in both short and long term trends when price and the oscillator diverge. That is, when price makes a new high or new low, but the oscillator does not make a new high or new low. What is happening here is that, although the price has continued to rise or fall, the momentum of the most recent swing is not as great as it was on the previous swing. This indicates that whoever is driving the market is losing commitment to the trending move.

Types of Divergence

In his book Trading For A Living, Dr Alexander Elder identifies three classes of divergence:

Class A

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