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.
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
More uses of Frontrunner
Moving average breaks of Frontrunner will be covered in Lesson 2