What does the divergence index measure?

The divergence index is designed to measure the volatility-adjusted differences between two moving averages. This metric is particularly useful for identifying potential trends or reversals in price movements by analyzing the relationship between these moving averages. When the index reflects a significant divergence between the two averages, it often signals a shift in momentum, which can be critical for traders looking to make informed decisions based on developing market conditions.

This is especially important in technical analysis where divergence between price and indicators can provide insights into strength or weakness of trends, aiding traders in timing their entries and exits more effectively. By focusing on the divergence index, traders can refine their strategies based on this relationship rather than relying solely on price movements or other less specific metrics.