What Is Divergence?
Divergence occurs when price and a momentum oscillator (RSI, MACD, Stochastic) move in opposite directions. Bearish divergence: price makes a higher high, but the oscillator makes a lower high, indicating weakening upward momentum despite new price highs. Bullish divergence: price makes a lower low, but the oscillator makes a higher low, indicating selling pressure is diminishing despite new price lows.
How Divergence Works
There are two types: regular divergence (signals potential reversal) and hidden divergence (signals trend continuation). Regular bearish: higher high in price, lower high in oscillator. Regular bullish: lower low in price, higher low in oscillator. Hidden bearish: lower high in price, higher high in oscillator. Hidden bullish: higher low in price, lower low in oscillator.
Why It Matters for Traders
Divergence is one of the most reliable early warning signals for trend exhaustion. The key word is "early" — divergence signals weakening momentum but does not guarantee immediate reversal. Price can continue in the trend direction for extended periods after divergence appears. The best practice: use divergence on higher timeframes (4H, daily) for directional bias, then wait for a lower-timeframe trigger (break of structure, pattern completion) before entering.
