Don't be.

(Originally published on May 12, 2015 on See It Market)

Nearly all technical analysts of stocks and other securities make use of technical indicators to help them make trading and investing decisions.

Technical indicators are created by applying a mathematical function to the price and volume data of the underlying security. Technical analysts frequently compare the movement and direction of indicators versus price and doing so gives rise to the technical concept of "divergence."

Divergence Defined

Put simply, divergence is a situation where the price of a security is moving in one direction and the indicator in the other.

Significant divergence is often interpreted as a reliable sign of a pending price trend change. For example, if the price of a security is trending down, while an indicator has started moving higher, technical analysts will conclude that the price of the security is about to bottom and start moving higher as well.

The following is a chart from Investopedia illustrating the concept:

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Pitfalls of Divergence

Unfortunately, divergence happens to be the most overused and poorly understood technical concept leading many traders to make wrong decisions about the status of the market or the likely direction of a security.

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