An oscillator is a technical analysis tool that constructs high and low bands between two extreme values, and then builds a trend indicator that fluctuates within these bounds. It is supposed to be known as the advanced indicator in Technical Analysis. If oscillates between the two extremes over-bought and over-sold. All the oscillators give us two different informations.
- It defines over-bought and over-sold conditions.
- It creates a divergence with the price actions.
Divergences are of two types.
- Positive divergence
- Negative divergence.
A positive divergence is also known as a bullish divergence and a negative divergence is known as a bearish divergence.
A divergence is basically a non-confirmation between the movement of the price line and the movement of the oscillators. Oscillators are more normally in tandem with the price line. Sometimes it is found that the price line and the oscillators are not moving in tandem. This is the point of disagreement between the price line and the oscillators. This disagreement is called divergence.
Positive divergences are of two types.
- Price making a lower bottom. Oscillators making a higher bottom.
- Price making lower bottom oscillator making a double bottom.
Negative divergences are of two types.
- Price making higher top oscillator making a lower top.
- Price making higher top oscillator making a double top.
Let us note: –
All the negative divergence has got a bearish implication and must occur after a sharp price that is at the top. All positive divergence has a bullish implication and must occur after a fall. That is at the bottom.