Divergence is typically used by technical traders when the price is moving in the opposite direction of a technical indicator. The purpose of divergence is to accurately identify bottom and top turns of the market. Frontrunner is best suited for this purpose.
Frontrunner is a proprietary technical signal of Algomodel and is only available in Algomodel Signals Pro.
Levels of Divergence
Level 1 Divergence for bottom: When the price makes a new low, but the indicator does not.
Level 2 Divergence for bottom: When the price is the same as a previous bottom, but the indicator is higher than the previous bottom.
Level 3 Divergence for bottom: When the price is higher than the previous bottom, but the slope of the price difference is much less than that of the indicator.
Unconfirmed Divergence: When all conditions for divergence are in place, but the price has not turned, nor has Frontrunner broken its moving average.
General
Top divergence is just the inverse of the bottom divergence
Level 2 divergence is easy to spot as it usually happens against top resistance or bottom support.
Divergence do not always occur at major turns.
Daily Stock Chart Example
Notice that we do not always get divergence at all key turning points, but Frontrunner’s average break can be used for those situations. This will be discussed in another lesson.
Weekly Stock Chart Example
If you are a long term investor and not bothered with the daily noise, it is best to look at a weekly chart. I marked the same divergences on the weekly chart of Bank of America
Power Signals
We are including two power signals in our latest version of Algomodel Signals Pro. Both signals uses a Frontrunner break to trigger a signal.
Power Signal 1 (P1) is triggered with a Frontrunner break in extreme oversold or overbought territories.
Power Signal 2 (P2) is triggered with a Frontrunner break when divergence level 1 is in place.
During strong trends these signals can also be wrongly triggered, and the best confirmation still remains a trend line break.
Spotlight Example
The power signals are highlighted in a Spotlight exploration using a yellow color for P1 and an orange color for P2 as shown in the example below.
Power Signal 2 Example
We show a Power Signal 2 example. Sometimes you will only get a short period run until a strong trend line halts the progress. Some trend lines are so strong that the next day’s movement will be in the opposite direction, giving no confirmation of the signal. You need to remember that the power signal is only shown for divergence for a certain period for level 1 divergence, there may be many more divergence signals at different periods as shown on charts above. For that reason, one still need to check all Frontrunner breaks as shown in Spotlight to identify the other signals that do exist at other turning points.
More uses of Frontrunner
Moving average breaks of Frontrunner will be covered in Lesson 2