Updated on July 18, 2023
Positive divergence is a technical analysis term used to describe a situation where the price of an asset moves in the opposite direction of a relevant indicator or oscillator, indicating a potential reversal or change in trend. It occurs when the price forms lower lows while the indicator forms higher lows (in the case of an uptrend) or when the price forms higher highs while the indicator forms lower highs (in the case of a downtrend).
How is positive divergence used?
Positive divergence can be used as a tool by traders and investors to inform their decision-making process regarding when to buy or sell an asset. By identifying positive divergence, traders may interpret it as a signal that the current trend may be weakening, potentially indicating an opportunity to enter or exit a position.
Upon exiting their trading positions, traders will also have to calculate the tax liability depending on the holding period and the applicable tax rate.