Divergence Index (Diver)

The Divergence Index represents a measure of the divergence between two sets of values (typically between prices and an oscillator). The Divergence Index ranges from +100 to –100.

Divergence is measured at the right-hand point of the trend lines of every peak that is confirmed by one lower high to the right. Therefore, the divergence signal does not occur until the close of the bar following the current peak. This peak represents the potential significant reversal point.

To better visualize what the Divergence Index measures, imagine a trend line drawn between the number and the first circle to its left and a corresponding trend line drawn on the oscillator covering the same time frame. If the slopes of these two lines are identical, the Divergence Index value equals zero.

For price peaks, if the slope of the trend line drawn on the bar chart is greater than the slope of the trend line drawn on the oscillator, the Divergence Index will be positive. The larger this difference, the greater the Divergence value. Likewise, if the slope the trendline drawn on the bar chart is less than the slope of the trendline drawn on the oscillator, the Divergence Index will be negative. Furthermore, if the slope of the trend line on the bar chart is upward and the slope of the trendline on the oscillator is downward, the divergence is referred to as classic. Some market theoreticians believe that a large positive classic divergence (positive bar slope, negative oscillator slope) occurring at a price peak indicates a greater chance for a price reversal. In any case, the Divergence Index study can systematically detect divergence using a Market Scan or a Study Alert.

The Level parameter indicates where the left point (the circles) of the trend lines are placed by specifying the number of lower highs that must occur on both sides of the peak in order to advance the circle. Lower Level parameter values result in shorter trend lines.

When the Peak parameter is checked, the oscillator trend line may not use the same points in time as the bar chart trend line. Instead, the study seeks out the peaks in the oscillator that correspond to the peaks in the price and uses them to place the trend line on the oscillator. The corresponding points may be shifted either left or right depending on the slope of the oscillator at the time of the price peak. If the slope of the oscillator is positive, the study moves the oscillator point associated with the peak to the right. Conversely, if the slope of the oscillator is negative, the study moves the oscillator point associated with the peak to the left. In this case, the study places the signal one bar after either the peak in the price or the peak in the oscillator, whichever occurred last.

When the Current parameter is checked, divergence is measured at the current bar all the time. In this case, the study does not wait for a lower high to confirm the divergence at the current bar.

For price valleys, simply think of the chart being upside down and apply the same analysis.

A key element in understanding what divergences can be created is the ability to create User Values within the Formula Toolbox. These user values are then available through the Indicator parameter. The default list simply enables basic pattern divergence and not divergence between patterns and studies. Therefore, employing a User Value to input a study from the study list in the Formula Toolbox can be quite helpful.

Divergence Index Parameters