A:

“Convergence” generally means coming together, and “divergence” generally means moving apart. In the world of finance and trading, Convergence and divergence are used to describe the directional relationship of two trends, prices or indicators.

Convergence

Most traders refer to a convergence when describing the price action of a futures contract. Here, convergence describes the phenomenon of the futures price and the cash price of the underlying commodity moving closer together over time. The actual market value of a futures contract is lower than the contract price at issue because traders have to factor for the time value of the security. As the expiration date on the contract approaches, the premium on the time value shrinks and the two prices converge.

In technical analysis, however, convergence occurs when the price of an asset, indicator or index moves in the same direction as a related asset, indicator or index. For example, there is convergence when the Dow Jones Industrial Average gains at the same time that its accumulation/distribution line is increasing.

Divergence

Divergence is the opposite of convergence. When the value of an asset, indicator or index moves, the related asset, indicator or index moves in the other direction. Technical traders are much more concerned with divergence than convergence, largely because convergence is assumed in a normal market. Divergence is interpreted to mean that a trend is weak or potentially unsustainable.

Divergence can be positive or negative. For example, a positive divergence would occur if a stock is nearing a low but its indicators start to rally. This would be a sign of trend reversal, potentially opening up an entry opportunity for the trader.

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