Introduction
What is a trading divergence?
In trading, we refer to a divergence when a technical indicator's curve moves in the opposite direction of the asset's price. This discrepancy often signals potential reversals or continuations in price trends.
Commonly used oscillators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are popular tools for identifying divergences.
Types of Divergences
1. Bullish Divergences
1.1 Standard Bullish Divergence
- Context: Forms during a downtrend, suggesting a possible trend reversal upward.
Detection:
- Price makes a lower low, but the indicator fails to confirm (i.e., does not make a lower low).
- Visualized as a "closed angle" from base to tip.
1.2 Hidden Bullish Divergence
- Context: Occurs in an uptrend, indicating a continuation after consolidation.
Detection:
- Price holds above its prior low, but the indicator makes a lower low.
- Forms an "open angle" from base to tip.
2. Bearish Divergences
2.1 Standard Bearish Divergence
- Context: Appears in an uptrend, signaling a potential downturn.
Detection:
- Price makes a higher high, but the indicator does not.
- Creates an "open angle" from tip to base.
2.2 Hidden Bearish Divergence
- Context: Develops in a downtrend, hinting at further decline.
Detection:
- Price fails to make a higher high, while the indicator does.
- Forms a "closed angle" from base to tip.
Key Considerations
- Divergences are alerts, not direct signals. Always wait for price confirmation (e.g., breakouts, candlestick patterns).
- Trend analysis is critical. Divergences align best with the overarching trend (per Dow Theory).
- Focus on price extremes (highs/lows), including wicks of candlesticks, for accurate detection.
👉 Master these strategies with advanced trading tools
Practical Tips
- Prioritize mastering standard divergences—they’re more intuitive and frequent.
- Use divergences alongside other tools (e.g., support/resistance, volume).
- Avoid overtrading—divergences can persist longer than expected.
FAQ
Q: Can divergences predict exact reversal points?
A: No. They highlight weakening momentum but require price action confirmation.
Q: Which indicators work best for divergence trading?
A: RSI and MACD are most reliable due to their oscillating nature.
Q: How do I avoid false divergences?
A: Always contextualize divergences within the broader trend and timeframe.
👉 Explore real-world divergence examples
Conclusion
Divergences are powerful yet nuanced tools. While they provide early warnings, their true value emerges when combined with disciplined price analysis. Practice identifying them on historical charts to build confidence before live trading.
Remember: The price is the ultimate judge—divergences merely whisper possibilities.
### SEO Keywords:
- Trading divergences
- Bullish and bearish divergences
- RSI/MACD divergence
- Trend reversal signals
- Hidden divergence trading