Institutions use various indicators to detect divergences in financial markets. Here are some of the most commonly used indicators you should know:
1. Moving Average Convergence Divergence (MACD): MACD is a popular indicator that measures the relationship between two moving averages of an asset's price. It helps identify potential divergences between the MACD line and the price, indicating a possible change in the trend.
2. Relative Strength Index (RSI): RSI measures the magnitude of recent price changes to determine whether an asset is overbought or oversold. Divergences between the RSI and the price can signal a potential reversal or a continuation of the current trend.
3. Stochastic Oscillator: The stochastic oscillator compares the closing price of an asset to its price range over a specified period. Divergences between the stochastic oscillator and the price can indicate potential trend reversals.
4. Moving Average Divergence/Convergence (MADC): MADC is a variation of the MACD indicator that compares two moving averages of different lengths. Divergences between the MADC and the price can help identify potential trend reversals.
5. Volume Divergence: Volume divergence occurs when there is a significant difference between price movements and trading volume. Higher volume during price decreases or lower volume during price increases can indicate a potential divergence.
6. Price Oscillators: Oscillators like the Commodity Channel Index (CCI) and the Average True Range (ATR) can also help detect divergences. These indicators compare the current price to an average or a range, providing insights into potential trend reversals.
7. Fibonacci Retracement: Fibonacci retracement is a technical analysis tool that identifies potential levels of support and resistance based on the Fibonacci sequence. Divergences between the price and Fibonacci retracement levels can suggest possible trend reversals.