What Is Divergence in Trading? How to Spot It on a Chart
The price makes a new high, but the indicator doesn't. That disagreement is called divergence. Here's how to find it and why trading on it alone is dangerous.
What it is
Divergence is a disagreement between the price and an indicator, most often RSI or MACD. It suggests the move is losing strength.
| Type | Price | Indicator | Hint |
|---|---|---|---|
| Bearish | Higher new high | Lower high | The rally is weakening |
| Bullish | Lower new low | Higher low | The decline is weakening |
Example
The price reached $110, pulled back, then rose to $115. RSI was 75 at the first peak and 65 at the second. The price is higher, but the strength of the rally is lower: that's bearish divergence.
How to use it
- It's a warning, not a signal. Divergence can last a long time while the trend continues.
- Wait for confirmation: a trendline break, a reversal candle, a break of the last low.
- Look at higher timeframes: on minute charts there are far too many divergences.
- A stop-loss is mandatory, placed beyond the last swing point.
How not to drown in indicators is covered in the lesson indicators without the obsession. Why you shouldn't try to catch reversals against a strong move is in the article trend trading.
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- Divergence is a disagreement between price and an indicator.
- It shows a move is weakening, not the exact reversal point.
- Enter only with confirmation and a stop-loss.
Frequently Asked Questions
Which indicator is best for finding divergence?
RSI and MACD are used most often. The principle is the same: compare the swing highs and lows of the price and the indicator.
What is hidden divergence?
It's the reverse situation: the price makes a higher low while the indicator makes a lower low. It's considered a hint that the trend will continue.
Why didn't the divergence work?
Because it doesn't guarantee a reversal. In a strong trend, divergence can appear several times in a row while the price keeps going.
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