Moving Average Convergence-Divergence Definition. Moving Average Convergence-Divergence, or “MACD”, is a common technical indicator used by forex traders to detect and confirm trends in price behavior of their target currencies. It is a lagging indicator as it reacts after a trend has blogger.com: Forextraders Aug 23, · What Is Convergence? Convergence is the movement of the price of a futures contract toward the spot price of the underlying cash commodity as the delivery date approaches Dec 06, · The definition of divergence in Forex is a discrepancy in the readings of the highs and lows of the price chart with the readings of a technical indicator. For example, the price of an asset may go up for a long time, but the oscillator curve will move towards the oversold blogger.com reverse is also true. Let's consider an example of Forex divergence on the EURUSD chart
Divergence and convergence in forex
Convergence is the movement of the price of a futures contract toward the spot price of the underlying cash commodity as the delivery date approaches. It simply means that, on the last day that a futures contract can be delivered to fulfill the terms of the contract, convergence definition forex, the price of the futures and the price of the underlying commodity will be nearly equal.
The two prices must converge. If not, an arbitrage opportunity exists and the possibility for a risk-free profit, convergence definition forex. Convergence happens because the market will not allow the same commodity to trade at two different prices at the same place at the same time.
For example, you rarely see two gasoline stations on the same block with two very different prices for gas at the pump, convergence definition forex. Car owners will simply drive to the place with the lower price. In the world of futures and commodities trading, big differences between the futures contract near the delivery date and the price of the actual commodity are illogical and contrary to the idea that the market is efficient convergence definition forex intelligent buyers and sellers.
If significant price differences did exist on the delivery date, there would be an arbitrage opportunity and the potential for profits with zero risk. The idea that the spot price of a commodity should equal the futures price on the delivery date is straightforward. Purchasing the commodity outright on Day X paying the spot price and purchasing a contract that requires delivery of the commodity on Day X paying the futures price are essentially the same thing.
Buying the futures contract adds an extra step to the process: step one is to buy the futures contract, and step two is to take delivery of the commodity. Convergence definition forex, the futures contract should trade at or near the price of the actual commodity on the delivery date. If these prices somehow diverged on the delivery date, there is probably an opportunity for arbitrage.
That is, there is the potential to make a functionally risk-free profit by purchasing the lower-priced commodity and selling the higher-priced futures contract—assuming the market is in contango. It would be the opposite if the market were in backwardation. If a futures contract's delivery convergence definition forex is several months or years in the future, the contract will often trade at a premium to the expected spot price of the underlying commodity on the delivery date.
As the delivery date approaches, convergence definition forex, the futures contract will depreciate in price or the underlying commodity must increase in priceand in theory, the two prices will be equal on the delivery date. If not, then traders could make a risk-free profit by exploiting the convergence definition forex in prices, convergence definition forex.
The principle of convergence also applies when a commodity futures market is in backwardationwhich happens when futures contracts are trading at a discount to the expected spot price. In this case, futures prices will appreciate or the price of the commodity falls as expiration approaches, until the prices are nearly equal on delivery date, convergence definition forex. If not, traders could make a risk-free profit by exploiting any price difference via arbitrage transactions.
Trading Basic Education. Financial Futures Trading. Soft Commodities Trading. Interest Rates. Your Money. Personal Finance. Your Practice, convergence definition forex. Popular Courses. What Is Convergence? Key Takeaways Convergence is the movement in the price of a futures contract toward the spot or cash price of the underlying commodity over time. The price of the futures contract and the spot price will be roughly equal on the delivery date.
If there are significant differences between the price of the futures contract and the underlying commodity price on the last day of delivery, the price difference creates a risk-free arbitrage opportunity. Risk-free arbitrage opportunities rarely exist because the price of the futures contract converges toward the cash price as the delivery date approaches.
Compare Accounts. Advertiser Disclosure ×. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace, convergence definition forex. Related Terms Contango: What It Takes Contango is a situation in which the futures price of a commodity is above the spot price.
Backwardation Definition Backwardation is when futures prices are below the expected spot convergence definition forex, and therefore rise to meet that higher spot price. Understanding Cash Price The cash price is the actual amount of money that is exchanged when commodities are bought and sold in the real world. Front Month Definition Front month, convergence definition forex, also called "near" or "spot" month, refers to the nearest expiration date for a futures or options convergence definition forex. Inverted Market Definition An inverted market occurs when the near-maturity futures contracts are higher in price than far-maturity futures contracts of the same type.
Short the Basis Definition Short the basis refers to the simultaneous buying of a futures contract and selling the underlying asset to hedge against future price appreciation. Partner Links, convergence definition forex. Related Articles. Trading Basic Education Commodity Spot Price vs. Futures Price: What's the Difference? Commodities Who Sets the Price of Commodities? Financial Futures Trading Convergence definition forex are Bitcoin Futures Priced?
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Convergence. Convergence. Convergence is a situation in a trade when the price of the underlying asset shifts towards that of the futures contract and vice-versa. an international organization engaged in the resolution of disputes within the financial services industry in the Forex market Moving Average Convergence-Divergence Definition. Moving Average Convergence-Divergence, or “MACD”, is a common technical indicator used by forex traders to detect and confirm trends in price behavior of their target currencies. It is a lagging indicator as it reacts after a trend has blogger.com: Forextraders Mar 12, · Convergence Normally, the contract price of a futures contract is higher than the current price of the underlying asset (normally a commodity). The futures contract price is higher because of the effect of the time value of money
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