3 Divergence Signals That Help Traders Catch Trend Reversals and Increase Profits

Why Use Indicators to Find Reversal Points

Traders know that identifying reversal points is one of the best entry signals because they mark zones where the price is at each trend’s favorite levels. If it’s a reversal of an uptrend, traders can lock in profits at the highest prices. Conversely, if it’s a reversal of a downtrend, it opens opportunities to buy at the lowest prices.

However, estimating reversal points based on news, fundamental analysis, or mere observation is very risky. Professional traders therefore prefer to use indicators that can signal reversals to help more accurately predict trends.

Principles for Selecting Indicators to Signal Reversals

Most indicators used to find reversal points are Momentum types that can identify Overbought (overbought) or Oversold (oversold) zones.

However, a limitation of directly using Momentum Indicators is that they often generate false signals during strong market trends because Overbought or Oversold signals can persist for a long time before a reversal occurs.

An effective solution is to use Divergence, which compares conflicting movements between price and indicator signals. This technique helps filter out false signals and identify more reliable reversal points.

3 Indicators That Help Detect Reversal Points

1. RSI Divergence – A Basic Tool for Traders

RSI (Relative Strength Index) is a Momentum Indicator that provides values between 0 and 100. Traders generally interpret RSI as follows:

• RSI above 70: Indicates Overbought (excessive buying), which may signal a sell
• RSI below 30: Indicates Oversold (excessive selling), which may signal a buy

The problem is that during strong trends, RSI can stay in Overbought or Oversold zones for a long time, making trading decisions based solely on RSI signals unreliable, potentially leading to missed entries or premature exits.

Proper use of RSI Divergence:

In an Uptrend (Bearish Divergence):

• Check if the price makes new highs while RSI stays below or does not make new highs above 70
• This indicates that although the price is rising, the upward momentum is weakening
• When RSI drops below 70, it becomes a safe sell signal or exit point

In a Downtrend (Bullish Divergence):

• Observe if the price makes new lows while RSI stays above or does not make new lows below 30
• This suggests that despite the price falling, selling pressure is waning
• When RSI rises above 30, it signals a more reliable buy opportunity

2. MACD Divergence – A Versatile Momentum Indicator

MACD (Moving Average Convergence Divergence) is a versatile indicator capable of indicating both trend and momentum.

Basic MACD Reading:

• When MACD crosses above zero: trend is bullish
• When MACD crosses below zero: trend is bearish

Using the Histogram (the difference between MACD and Signal Line) to gauge momentum:

• Positive histogram with high values: strong uptrend
• Positive histogram decreasing: weakening uptrend
• Negative histogram with large magnitude: strong downtrend
• Negative histogram with decreasing magnitude (less negative): weakening downtrend

Using MACD Divergence:

In an Uptrend (Bearish Divergence):

• Price makes new highs, but the histogram continues to rise or makes lower highs
• Indicates momentum is waning, and the price increase may not be sustainable

In a Downtrend (Bullish Divergence):

• Price makes new lows, but the histogram (the negative values) are less negative than before
• Suggests selling pressure is decreasing, and a reversal upward may be imminent

3. OBV Divergence – Signals from Trading Volume

OBV (On-Balance Volume) combines volume data with price movements, calculating whether accumulation (buying pressure) or distribution (selling pressure) is occurring.

How to read OBV:

• Rising OBV indicates accumulation and strong buying interest
• Falling OBV indicates distribution and strong selling interest

OBV Divergence to Detect Hidden Signals:

In an Uptrend (Bearish Divergence):

• Price makes new highs, but OBV does not follow or even declines
• This suggests that although prices are rising, large investors are gradually exiting
• A warning that the rally may not be sustainable and could reverse

In a Downtrend (Bullish Divergence):

• Price makes new lows, but OBV continues to rise
• Indicates that large players are gradually accumulating despite falling prices
• A positive sign that the downtrend may be losing strength and a reversal upward could occur

Combining Divergences for Better Reversal Detection

To maximize the effectiveness of reversal detection systems, consider combining signals from multiple indicators. For example:

• When a Bearish Divergence appears simultaneously on RSI and MACD, with OBV decreasing, the warning signal is stronger
• When a clear Bullish Divergence is confirmed across several indicators, the likelihood of a reversal is higher

Another key point is timing entries and exits appropriately. Don’t wait for divergence to complete fully; when you see initial signs — for example, Histogram starting to decrease — you can prepare for a trend change.

Besides RSI, MACD, and OBV, other momentum or volume indicators like Stochastic, Williams %R, or Money Flow Index can also be used to find reversal points. The principle is to observe divergence between price movements and indicator signals. Once understood, this approach can be applied to any indicator you prefer.

Using divergence techniques to find reversal points is a valuable tool for developing more accurate and reliable trading systems. Try applying this method to your analysis and observe the results over time.