Divergence

Divergence occurs when price moves in one direction while a technical indicator moves in the opposite direction. There are two types: bearish divergence (price makes higher highs, indicator makes lower highs) and bullish divergence (price makes lower lows, indicator makes higher lows). It is one of the most reliable early warning signals of a potential trend reversal.

How Divergence Is Used in Trading

Bearish divergence between price and RSI is the classic setup. When price pushes to a new high but RSI fails to make a new high, it reveals that the upward momentum is weakening even as price reaches new levels. This disconnect often precedes a correction or reversal within one to five bars.

Hidden divergence is a continuation signal, the opposite of regular divergence. In an uptrend, when price makes a higher low but the indicator makes a lower low, it suggests the trend will continue. This is less well-known but valuable for adding to existing positions.

Divergence signals are most reliable on higher timeframes (H4, D1) and when confirmed by multiple indicators. An MACD divergence confirmed by RSI divergence on the same timeframe produces a much higher-probability signal than either indicator alone.

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