Well-Known Member
Dear Mohan
Thank you for your response. I appreciate that.
First to answer your question on what is legitimate divergence.
I hope You know what is divergence. In one line, divergence occurs when price and indicators travels in opposite direction to each other. That is the indication of momentum shifting in opposite direction. Whenever momentum shifting happens price reverses. There are times when price and indicator travels in opposite divergence for long time. during this period, there would be lot of indication of price would reverse, but it wouldnt. These are fake divergences. I supposed to say,we are not able to find the correct divergence. Instead I call it as fake divergence. and at one point in time divergence effect comes in to action and price reverses. So that divergence is legitimate divergence.

Please find the attached snapshot where it shows regular bearish divergence between price and MACD indicator.Look at the red marked lines where it showed bearish divergence couple of times but price didnt reverse and finally price reversed with blue line marked divergence. Those red marked divergences are fake divergences and blue marked divergence is the legitimate divergence. And the Green marked period is the whole divergence period. Here the challenge is to find out that legitimate divergence . Hope you now get what I meant.

Very relevant issue.
Found a video on YouTube on this topic. What the trader is saying is that after the divergence has happened wait for the price to return to the middle zone (after leaving THE OVERBOUGHT/OVERSOLD ZONES) to enter a trade. Then there is a greater chance for a reversal to happen.

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