What is Divergence? Traders Need to Know About This!

Divergence is a technical analysis tool that can be difficult to understand, but when used correctly, it helps you better time your trades. It occurs when the price moves in one direction, but an indicator ( such as MACD or RSI) does not move in the same direction — signaling that something is out of sync in the market.

Why is Divergence important for trading?

When the price hits a new high (High) or a new low (Low), indicators should typically follow the trend. But what if they don’t? That’s a red flag (Red Flag) indicating that the momentum of the trend is weakening and a market reversal could be imminent.

Divergence can tell you 2 important things:

• The trend may reverse (Reversal) — a typical conflicting signal
• The trend may continue (Continuation) — a hidden conflicting signal

Two types of Divergence you need to know

1. Regular Divergence - signals of a reversal

Bullish Divergence occurs at the end of a downtrend — the price makes a new low, but RSI or MACD does not follow downward. This indicates a potential shift to an uptrend.

Bearish Divergence occurs at the end of an uptrend — the price makes a new high, but the indicator does not strengthen accordingly. This suggests the upward momentum may be exhausted and a quick decline could follow.

How to trade Regular Divergence:

1. Watch for reversal points — look for consecutive highs and lows
2. Observe the indicator — RSI overbought (>70) or oversold (<30)?
3. Enter cautiously — wait for the price to confirm the reversal before entering

2. Hidden Divergence - signals of continuation

Hidden Bullish Divergence — the price makes a higher low, but MACD or RSI still shows downward momentum. This suggests the downtrend is not over yet, and the price may continue lower.

Hidden Bearish Divergence — the price makes a lower high, but the indicator still shows strength. This indicates the uptrend may not be finished and a downward correction could continue.

How to trade Hidden Divergence:

1. Identify the main trend — Is the price in an uptrend? Downtrend?
2. Check the indicator — Is MACD or RSI still moving in the same direction?
3. Follow the main trend — once the signals align, trade in the trend’s direction

Which indicators are good for Divergence?

MACD — Clear signals through crossovers. When the two lines diverge, the trend is strong; when they converge, watch out for potential change.

RSI — Overbought (>70) or oversold (<30) levels. Divergence occurs when the price indicates one thing, but RSI suggests another.

Williams %R — Similar to RSI but with less lag. It shows overbought and oversold conditions.

Real example: How to trade Divergence?

True Bullish Divergence: BTC price drops to a lower low at $29,000, but RSI stays at 35 (Oversold), not making a new low. This signals the selling pressure may be exhausted, and an uptrend could begin. If a green candle forms, it’s a good entry opportunity.

True Bearish Divergence: ETH price makes a higher high at $2,000, but MACD does not strengthen accordingly. Soon after, ETH price drops sharply, indicating the market’s upward momentum is fading.

Important reminders

Divergence is not 100% accurate. Sometimes multiple divergences occur before the price actually reverses. Therefore:

• Wait for confirmation — don’t enter immediately upon seeing divergence; wait for price action to confirm
• Set a tight Stop Loss — divergence signals can be false; always protect your position
• Check the main trend — if the trend is still strong, divergence alone may not be enough to act on

Summary: Use Divergence to create opportunities

Divergence helps serious traders see market weaknesses before the price changes direction. Whether it’s Regular Divergence indicating a reversal or Hidden Divergence signaling continuation, both can improve your decision-making.

The key is to understand the situation, wait for real confirmation, and remember that “Trend is King.” Divergence is just an assistant — used correctly, it can help you increase your profits in your trading portfolio.