What is Divergence? A trading guide to Divergence you need to know

Divergence is a conflicting signal where technical indicators do not align with the actual price trend. This signal often appears during trend reversals, but there are other patterns indicating trend continuation as well. For traders who want to use Divergence as a tool to find entry points, it is essential to clearly understand the difference between Regular Divergence and Hidden Divergence.

How to Trade Divergence: Basic Steps

1. Observe Price Movements

Look for situations where the price makes a new high (Higher High) or a new low (Lower Low) consecutively. This is the starting point for identifying potential Divergence signals.

2. Compare with Indicators

Compare with indicators such as MACD, RSI, or Williams %R. If the price rises but the indicator falls, or vice versa, you have found Divergence.

3. Wait for Confirmation Signal

When the conflicting signals are clear, wait for the price to show a confirming move, such as a bullish candle (Bullish) or bearish candle (Bearish), before opening a position.

What Does Divergence Indicate?

Most importantly: Divergence shows that the momentum of the trend is weakening. The phrase “Price is king, but the indicator tells the truth” captures the essence of what Divergence tries to convey.

• If the price makes a new high but the indicator does not follow = bullish momentum is weakening
• If the price makes a new low but the indicator does not confirm = bearish momentum is fading

Regular Divergence vs Hidden Divergence: What’s the Difference?

Regular Divergence - Trend Reversal Signal

Regular Divergence occurs when the price trend remains strong, but the indicator does not follow suit. This suggests that a trend reversal is imminent, making it suitable for trading Reversal Patterns.

Bullish Regular Divergence

• Price makes lower lows while the indicator (such as RSI) does not go lower, remaining high
• Indicates: Downtrend is ending and an uptrend may begin
• Trading: Wait for a green candle, then buy upon confirmation. Set stop loss below the most recent low.

Bearish Regular Divergence

• Price makes higher highs while the indicator ###such as MACD( does not rise further, starting to decline
• Indicates: Uptrend is ending and a downtrend may start
• Trading: Wait for a red candle, then sell upon confirmation. Set stop loss above the most recent high.

) Hidden Divergence - Trend Continuation Signal

Hidden Divergence occurs when the price shows weak swings but the indicator still demonstrates strong momentum. This indicates that the trend is not over and will likely continue. It is suitable for Continuation Patterns.

Hidden Bullish Divergence

• Price makes higher lows (Weak) while the indicator still makes lower lows (Strong)
• Indicates: The uptrend will likely continue
• Trading: Buy at the next pullback trigger point. Set stop loss below the most recent low.

Hidden Bearish Divergence

• Price makes lower highs (Weak) while the indicator makes higher highs ###Strong###
• Indicates: The downtrend will likely continue
• Trading: Short at the next pullback point. Set stop loss above the most recent high.

Indicators Used to Detect Divergence

( MACD - Momentum Tracker

MACD crossing the Signal Line is a primary signal. If the price rises but MACD falls below, it’s a clear Bearish Divergence. Easy to use and suitable for beginners.

) RSI - Trading Strength Measurement

RSI in Overbought zone (>70) or Oversold ###<30### are good points to observe. When the price makes a new high but RSI weakens, it indicates Divergence that’s easy to interpret.

( Williams %R - Another Trading Indicator

Works similarly to RSI but with a 0-100 range. Used by traders who prefer more precision.

Real-World Examples of Divergence in Trading

) Example 1: Bullish Regular Divergence

Suppose BTC drops from $50,000 to $40,000 and then rises slightly. When it breaks $42,000, the price retraces to $38,000 ###below(, while RSI does not drop as low as before = clear Bullish Divergence, signaling a buy.

) Example 2: Bearish Regular Divergence

ETH rises from $2,000 to $3,500 and then retraces. When it climbs again to $3,800 ###above(, MACD is not as strong as before = Bearish Divergence, suggesting a short opportunity.

) Example 3: Hidden Bullish Divergence

A currency in an uptrend pulls back multiple times, but each time the lows are higher (Higher Low), and MACD remains strong = Hidden Bullish Divergence, indicating the uptrend will continue.

Cautions for Divergence Traders

1. Divergence is not 100% accurate - Sometimes, divergence occurs multiple times before a trend reversal. Wait for clear confirmation.

2. Always use Stop Loss - Even with good signals, have a backup plan. Set a loss of about 1-2% of your account.

3. Don’t rely solely on Divergence - Combine with Support/Resistance lines, moving averages, or other chart patterns for higher accuracy.

4. Timeframe matters - Divergence on hourly vs. daily charts can give different signals. Match the timeframe with your trading style.

5. Divergence is a probability indicator, not a definitive sell signal - Use it as a tool to assess likelihood, not as an absolute prediction.

Summary

Divergence is a conflicting signal between price and indicator. When well understood, it can be a powerful tool for identifying trend reversals (Regular) and trend continuation Hidden.

If you can distinguish whether the current situation is Regular Divergence or Hidden Divergence, combined with good risk management, this single tool can generate profits. Start by observing your charts frequently, then gradually incorporate it into your actual trading. Be patient—consistent practice is the key to reliable gains.