Divergence in Trading: A Tool Every Trader Must Know

In the Crypto market, you may see Bitcoin or other coin prices fluctuate sharply, but the (Indicator) technical indicators are sending conflicting signals. This is Divergence - a huge warning sign that suggests the price trend may be losing momentum or gaining strength.

What is Divergence?

Divergence is a conflict between price movements and signals from technical indicators that do not point in the same direction.

Simple example: Bitcoin’s price makes a Lower Low (lower than the previous), but the RSI does not confirm with further decline - this is a Divergence signal indicating the downtrend may be weakening.

Why is Divergence important?

• A quick warning signal of trend reversal
• Helps identify good entry and exit points for trading
• Increases win rate when used with other tools

Which indicators are best for finding Divergence?

MACD

An excellent trend indicator. When MACD moves opposite to the price = clear Divergence signal.

RSI (Relative Strength Index)

Only meaningful when RSI is in Overbought (above 70) or Oversold (below 30) zones. If RSI is in the middle range 30-70, it may give false signals often.

Williams %R

Works similarly to RSI but uses a 14-period timeframe. Often provides clear Divergence signals in Overbought/Oversold zones.

There are 2 main types of Divergence

1. Regular Divergence - Price Reversal Signal

Bullish Divergence appears when the price continues to decline and makes a Lower Low, but the indicator (such as RSI) does not confirm - it stops declining or starts rising, indicating selling pressure is weakening. Price may swing back up.

Bearish Divergence is the opposite: the price continues upward making a Higher High, but the indicator does not confirm - it continues to decline or retraces, indicating buying strength is weakening. Price may reverse downward.

How to trade Regular Divergence:

1. Wait for the price to make a Higher High or Lower Low while the indicator does the opposite.
2. Confirm with signals like reversal candles or break of Support/Resistance.
3. Enter a position following the reversal trend + set a Stop Loss at a certain level.

2. Hidden Divergence - Trend continuation signal

Hidden Bullish Divergence occurs in an uptrend. The price makes a Higher Low (weakly), but RSI still shows strong momentum = price will continue upward.

Hidden Bearish Divergence occurs in a downtrend. The price makes a Lower High (weakly), but RSI still shows downward momentum = price will continue downward.

How to trade Hidden Divergence:

1. Confirm the original trend remains strong ###uptrend = Hidden Bullish, downtrend = Hidden Bearish(
2. Wait for the price to break out in the original trend direction.
3. Enter buy/sell positions following the trend + set normal Stop Loss.

Examples from the Crypto market

) Bullish Divergence case on ETH

• ETH drops from $2,000 to make a new low at $1,500.
• RSI drops into Oversold ###below 30( but does not make a new low.
• Bullish Divergence signal appears = high probability that the price will bounce back up.

) Hidden Bullish Divergence case on BTC

• BTC in an uptrend from $45,000 to $55,000.
• During a pullback, the price makes a weak Higher Low (Higher Low), but MACD remains strong.
• Hidden Bullish Divergence signal = BTC continues upward.

Cautions

⚠️ Divergence is not 100% accurate

• Multiple Divergence signals may occur before the price changes direction.
• Sometimes Divergence fails, and the price does not change trend.

⚠️ Use with other tools

• Don’t rely solely on Divergence.
• Combine with Support/Resistance, Trend Lines, Volume.

⚠️ Choose the right indicator

• RSI works best in Overbought/Oversold zones (>70 or <30).
• In the middle zone 30-70, it may give false signals.

Summary

Bullish divergence signals weakening selling pressure and a potential rebound, while Bearish divergence indicates weakening buying strength and a possible decline. Use Divergence wisely + good risk management = you have a powerful tool in hand.

Remember: Trend is King, but Divergence is Queen that helps you know when the King might change direction.