When traders are going through their trades their main goal is to maximize their profits by risking lowest amount of capital as possible. For that to be possible you either have to buy at bottom of the trend or sell out your assets at the highest point of an ongoing trend. For traders to achieve this, they have to be trading near the pivot point of the price levels which in return will minimize the risks of your trade. For this whole system to work trading divergences come into play.
Now when it comes to identifying the divergences in the price movements it will not be as easy as we described the whole scenario above. For price action comparison you will need a indicator. You will have options in choosing among the indicators you can use but commonly used indicators are oscillators such as the RSI (Relative Strength Index) or CCI (Commodity Channel Index). The main idea of using oscillators as preferred indicators is to make the divergences easy to identify.
Divergences help a lot in pointing out the hoax movements that go on in the markets and to trade off the analysis provided by the divergences.
Now all you have to go through Price and Momentum to spot a divergence because of their dependency on each other when it comes to divergence, they go hand in hand. The oscillator you would be using will go higher with the continuity of price towards the upward direction and vice versa i.e. the oscillator will drop with the price. But if they are moving in opposite directions this will be known as a Divergence. The second type of the divergence you will spot is that when amplitude and size of the movement differ between the price and the oscillator.
Now there is a difference between the bullish and bearish divergence. You have to be careful making the trades while trading using divergence method on market trends. When going through a bullish divergence it is profitable for you to use “Call” options and when going through a bearish divergence it is profitable to use “Put” option on your trade.
The divergences are very helpful indicator and will help you make profits on your trades that is if you learn to use them with proper execution.