Divergence - When Indicators and Price Disagree
What is Divergence
Divergence occurs when price movement and technical indicator movement go in opposite directions. Typical examples include when price makes a new high but the indicator fails to exceed its previous high, or when price makes a new low but the indicator stays higher than its previous low.
Divergence matters because it shows that the internal momentum driving the trend is weakening. While price continues moving in its current direction, the momentum supporting that movement is declining. It's like a ball thrown upward still rising but slowing down - you can anticipate it will soon fall.
Divergence falls into two main categories: Regular Divergence and Hidden Divergence.
Regular Divergence
Regular divergence is a signal that foreshadows trend reversal. It indicates the existing trend's momentum is exhausting.
Bullish Regular Divergence
Appears during downtrends and suggests a potential shift from falling to rising.
Price: Lower Low Indicator: Higher Low
Price records a new low, appearing to continue declining, but the indicator maintains a level higher than its previous low. This means selling pressure is weakening and the downtrend may be ending soon.
Bearish Regular Divergence
Appears during uptrends and suggests a potential shift from rising to falling.
Price: Higher High Indicator: Lower High
Price makes a new high, but the indicator fails to exceed its previous high. Bullish momentum is weakening, and the uptrend may be approaching its end.
Regular Divergence Summary Table
| Type | Price | Indicator | Meaning | Expected Direction |
|---|---|---|---|---|
| Bullish Regular | Lower Low | Higher Low | Weakening bearish momentum | Upward reversal |
| Bearish Regular | Higher High | Lower High | Weakening bullish momentum | Downward reversal |
Hidden Divergence
Hidden divergence has the opposite character of regular divergence. It's a signal that foreshadows trend continuation, not reversal. It appears during corrections and suggests the correction is ending and the trend will resume.
Bullish Hidden Divergence
Appears during corrections in uptrends and foreshadows uptrend continuation.
Price: Higher Low - maintaining uptrend structure Indicator: Lower Low
Price is finding support at a level higher than the previous low, maintaining the uptrend structure, but the indicator temporarily dips lower. This indicates the correction has run its course and resumption in the trend direction (up) is likely.
Bearish Hidden Divergence
Appears during bounces in downtrends and foreshadows downtrend continuation.
Price: Lower High - maintaining downtrend structure Indicator: Higher High
Price faces resistance at a level lower than the previous high, maintaining the downtrend structure, but the indicator temporarily rises higher. The bounce is likely ending and price will resume falling.
Hidden Divergence Summary Table
| Type | Price | Indicator | Meaning | Expected Direction |
|---|---|---|---|---|
| Bullish Hidden | Higher Low | Lower Low | Correction complete in uptrend | Uptrend resumes |
| Bearish Hidden | Lower High | Higher High | Bounce complete in downtrend | Downtrend resumes |
Regular vs Hidden Divergence
| Comparison | Regular Divergence | Hidden Divergence |
|---|---|---|
| Signal nature | Trend reversal | Trend continuation |
| Appears at | End of trend | Mid-trend corrections |
| Reliability | High (especially on higher timeframes) | High when aligned with trend direction |
| Trading strategy | Counter-trend | Trend-following |
| Frequency | Relatively rare | Relatively common |
Beginners should first master regular divergence, then expand to hidden divergence as experience builds.
Best Indicators for Divergence
Divergence can be found on any oscillator indicator, but particularly effective ones include:
RSI (Relative Strength Index)
RSI is the most widely used indicator for divergence analysis. Its clear 0-100 range makes comparing highs and lows easy. Divergence is especially powerful when RSI is in overbought (above 70) or oversold (below 30) territory.
MACD
Divergence can be found on MACD's histogram or the MACD line itself. MACD histogram divergence typically appears before MACD line divergence, providing earlier signals.
Stochastic
The Stochastic Oscillator also has a 0-100 range like RSI, and divergence in overbought/oversold zones is valid. However, the Stochastic is more sensitive than RSI, so false divergence is slightly more common.
OBV
Divergence on OBV shows momentum changes from a volume perspective, providing different dimensional information than price-based oscillators. If price makes a new high but OBV fails to exceed its previous high, it's a strong warning that the rally lacks volume support.
How to Find Divergence on Charts
Step-by-Step Approach
- Identify the trend: First determine whether price is in an uptrend or downtrend.
- Identify price highs/lows: Find clear swing highs and swing lows.
- Compare indicator highs/lows: Check indicator values corresponding to those price points.
- Confirm directional disagreement: Compare whether price and indicator are moving in different directions.
- Additional confirmation: Validate the signal with other indicators or chart patterns.
Divergence Confirmation Checklist
- Are the two swing points formed within a reasonably close time period
- Did the indicator pass through neutral territory between the two swing points (e.g., RSI went between 30-70 before returning to an extreme)
- Is the divergence appearing on a meaningful timeframe (4-hour or higher recommended)
- Are price and indicator highs/lows clearly distinguishable
Factors That Increase Divergence Reliability
Higher Timeframes Mean Higher Reliability
| Timeframe | Divergence Reliability | Suitable Strategy |
|---|---|---|
| 1-min to 15-min | Low | Scalping (experienced only) |
| 1-hour to 4-hour | Medium | Swing trading |
| Daily | High | Medium-term trading |
| Weekly | Very high | Long-term positions |
Simultaneous Divergence Across Multiple Indicators
When divergence appears on both RSI and MACD simultaneously, reliability is higher than when appearing on just one indicator. As discussed in multi-indicator strategies, confidence increases when different types of indicators give the same signal.
Overlap with Key Support/Resistance
When divergence appears at Fibonacci retracement levels or major support/resistance lines, reversal probability increases further. Bullish divergence confirmed at the 61.8% Fibonacci level provides very strong buy evidence.
Common Mistakes and Cautions
Mistake 1: Forcing Divergence
After staring at charts long enough, you may "discover" divergence where none exists - confirmation bias. Divergence must be clearly visible. Don't force-draw lines or arbitrarily select swing points.
Mistake 2: Trading Immediately on Divergence
Divergence tells you "trend is weakening," not "reversal is happening right now." Price can continue in its current direction for a while after divergence appears. Always wait for actual reversal evidence like breakout confirmation, candlestick patterns, and volume.
Mistake 3: Trusting Divergence in Strong Trends
In strong trends, the trend often continues despite divergence appearing. Sometimes the first and second divergences are ignored and reversal only happens on the third. This "divergence chain" illustrates the risk of counter-trend trading.
Mistake 4: Ignoring Trend Direction
When using hidden divergence, you must confirm the existing trend direction. Looking for bullish hidden divergence in a downtrend is meaningless. Hidden divergence should only be used to confirm resumption in the direction of a clear existing trend.
Divergence in Cryptocurrency Markets
Cryptocurrency markets are highly volatile with frequent emotional overbought/oversold conditions, so divergence appears relatively often. This also means more false signals, so following these principles is important:
- Only trust divergence confirmed on 4-hour or higher timeframes
- Always set ATR-based stop losses
- Don't enter on single divergence without multiple indicator confirmation
- Prioritize divergence on major coins with sufficient volume (BTC, ETH)
Summary
Divergence is a powerful analytical technique that detects changes in trend momentum through price-indicator disagreement. Regular divergence signals trend reversal; hidden divergence signals trend continuation. Reliability is highest on higher timeframes with confirmation across multiple indicators. However, divergence is a "warning signal" not a timing tool, so additional confirmation and risk management are essential.
Next article: Multi-Indicator Strategy - Multiple Indicators Are More Accurate Than One