15 min - Divergence Strategy
One of the fundamental principles of technical analysis is that momentum often moves before price. But markets never move in perfect straight lines, and sometimes momentum indicators don’t align with price action. This mismatch is called a divergence, and for traders, it can be a powerful tool to anticipate reversals or continuations.
This guide will walk you through what divergence is, the different types you need to know, and how to trade them effectively. Plus, you can grab your free Divergence Cheat Sheet PDF at the end to keep as a quick reference.
What is Divergence?
In trading, a divergence occurs when the price of an asset and a technical indicator move in opposite directions.
Normally, if price makes a new high, the indicator should also make a new high.
But if price and the indicator disagree, a divergence forms — signaling that momentum and price action are out of sync.
Divergence is not an indicator itself but a concept applied to oscillators like RSI, MACD, or Stochastic. Its main purpose is to act as an early warning system that momentum is fading and a reversal or continuation may soon follow.
The opposite of divergence is convergence, when price and indicator move together.
How Does Divergence Work?
Markets move in patterns of highs and lows:
Uptrends → higher highs and higher lows.
Downtrends → lower lows and lower highs.
Traders aim to buy low and sell high — and divergences help spot when to buy at a low or sell at a high.
There are two main categories:
Regular Divergence → signals possible trend reversal.
Hidden Divergence → signals possible trend continuation.
Divergence Cheat Sheet Table
Here’s a quick reference for how divergences play out:
| Type | Price Action | Indicator Action | Signal |
|---|---|---|---|
| Regular Bullish | Lower lows | Higher lows | Trend reversal → Buy |
| Regular Bearish | Higher highs | Lower highs | Trend reversal → Sell |
| Hidden Bullish | Higher lows | Lower lows | Trend continuation → Buy |
| Hidden Bearish | Lower highs | Higher highs | Trend continuation → Sell |
Regular Divergence
Regular divergence warns of an upcoming trend reversal:
Regular Bullish Divergence:
Price makes lower lows, but the indicator makes higher lows.
Suggests sellers are losing strength, signaling a buy opportunity.
Often forms at the end of a downtrend.
Regular Bearish Divergence:
Price makes higher highs, but the indicator makes lower highs.
Suggests buyers are losing strength, signaling a sell opportunity.
Often forms at the end of an uptrend.
Hidden Bullish Divergence
Unlike regular divergence, hidden divergence points to trend continuation.
Hidden Bullish Divergence:
Price makes a higher low, while the indicator makes a lower low.
Suggests the uptrend is intact and ready to resume after a pullback.
Commonly found during retracements in an uptrend.
This is a strong buy signal for trend-following traders.
Hidden Bearish Divergence
Hidden Bearish Divergence:
Price makes a lower high, while the indicator makes a higher high.
Suggests the downtrend remains strong and will likely continue after a pullback.
Commonly seen during retracements in a downtrend.
This acts as a sell signal for traders riding the trend.
Best Divergence Indicators
Divergences can be spotted with many oscillators, but the most effective are:
RSI (Relative Strength Index) – most popular for divergence.
MACD (Moving Average Convergence Divergence) – great for momentum shifts.
Stochastic Oscillator – good for overbought/oversold conditions.
Money Flow Index (MFI) – particularly useful for hidden divergences.
RSI Divergence Explained
The RSI is a leading indicator that helps traders spot both regular and hidden divergences. However, RSI divergences should be confirmed with candlestick patterns or price structure — they’re not timing tools on their own.
Bullish RSI Divergence
Price makes lower lows, RSI makes higher lows.
Signals a possible reversal from bearish to bullish.
Often followed by strong rallies.
Bearish RSI Divergence
Price makes higher highs, RSI makes lower highs.
Signals a possible reversal from bullish to bearish.
Often followed by sharp declines.
Final Thoughts
Divergences are among the most powerful tools in a trader’s arsenal.
Regular Divergence = trend reversal signal.
Hidden Divergence = trend continuation signal.
For higher success rates:
Use divergences on higher timeframes (more reliable).
Combine with candlestick patterns or support/resistance levels for confirmation.
Focus on hidden divergences if you’re a trend-following trader.
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