Divergences Between Volume and Price: A Practical Strategy for Trading
Divergences between volume and price are a powerful signal in technical analysis to anticipate trend reversals. This strategy can be applied in both cryptocurrency markets and other financial assets. Here’s how to implement it:
Divergence Strategy
1. Bearish Reversal:
• Indicator: Price is rising, but volume begins to decrease.
• Interpretation: This may indicate weakness in the bullish movement, suggesting that buyers are losing interest.
• Action: Consider selling or taking profits before the decline occurs.
2. Bullish Reversal:
• Indicator: Price is falling, but volume begins to increase.
• Interpretation: Sellers may be exhausting, while buyers start to come in strongly.
• Action: Buy when the price shows signs of reversing upwards.
Practical Application
1. Confirm with additional indicators: Use tools like RSI or MACD to validate divergence signals.
2. Risk management: Set stop-loss orders at key levels to limit potential losses.
3. Observe larger trends: Divergences are more effective when they occur at significant support or resistance levels.
