Divergent is a warning sign of a trend reversal - How to trade skillfully and appropriately

The words “Divergent” or Divergence are among the technical tools that help traders detect market opportunities. However, many people still don’t understand what Divergence is or how to use it. Besides signaling a potential trend reversal, Divergence can also confirm that the current trend will continue.

Divergent is a sign of disagreement between price and indicator

An important aspect of trading is Divergence or Divergent, which occurs when the price and indicator do not move in the same direction. For example, when the price attempts to reach a new high, but the indicator (such as MACD or RSI) shows a bearish signal. This is called Divergence.

The causes of Divergence include:

• Price rising but indicator falling: indicating the bullish trend may be weakening and a correction could be imminent.
• Price falling but indicator rising: usually suggests buying momentum remains strong and a reversal upward might happen.
• Price steady but indicator showing divergence: indicates the current trend may still be intact.

The two main types of Divergence traders need to know

Regular Divergence - signals a possible trend reversal

Regular Divergence occurs when the price and indicator conflict, suggesting a change in trend direction is near. It often appears at the end of a trend when momentum wanes.

Bullish Divergence occurs at the end of a downtrend when:

• Price makes a new low (Lower Low)
• But the indicator does not confirm a strong decline or is slightly higher

This indicates the downtrend is losing strength, and a reversal upward could be imminent.

Bearish Divergence occurs at the end of an uptrend when:

• Price makes a new high (Higher High)
• But the indicator does not confirm a strong rise

This warns that the uptrend may be tiring, and a quick reversal downward could happen.

Hidden Divergence - signals the trend may still continue

Hidden Divergence is the opposite of Regular Divergence. If Regular Divergence suggests a trend change, Hidden Divergence indicates the trend is likely to continue.

Hidden Bullish Divergence:

• Price makes a slight pullback, forming a higher low
• But the indicator still shows strong bearish signals

Meaning: the uptrend is not over, and prices may continue upward.

Hidden Bearish Divergence:

• Price makes a slight rally, forming a lower high
• But the indicator still shows strong bullish signals

Meaning: the downtrend is ongoing, and prices may continue downward.

Important indicators for spotting Divergence

Not all indicators are equally effective for Divergence. Some measure momentum, others trend.

MACD - a versatile indicator

MACD works by comparing moving averages:

• If MACD is positive and increasing, the trend is strong upward.
• If MACD is negative and decreasing, the trend is strong downward.

When the price makes a new high but MACD does not follow, it signals a Regular Bearish Divergence.

RSI - key for overbought/oversold zones

RSI measures buying and selling strength on a scale of 0-100:

• RSI > 70 = overbought, risk of decline
• RSI < 30 = oversold, risk of rise

If the price drops into oversold territory but RSI does not decline accordingly, it indicates Bullish Divergence.

Williams %R - provides clear signals

Williams %R operates similarly to RSI but on a reversed scale (0-100):

• %R > -20 = overbought
• %R < -80 = oversold

Divergence is clear when price and %R do not agree in these zones.

How to trade Divergence effectively

Step 1: Find Regular Divergence to catch reversals

1. Identify highs/lows: Watch if the price makes new highs (Higher High) or new lows (Lower Low).
2. Check indicators: See if MACD, RSI, or %R do not confirm the move.
3. Wait for confirmation: When candles start to reverse (color change or candlestick pattern), consider entering.
4. Set stops: Place Stop Loss above the recent high (for shorts) or below the recent low (for longs).

Step 2: Use Hidden Divergence to continue the trend

1. Spot swings: Look for higher lows in an uptrend or lower highs in a downtrend.
2. Verify indicator strength: Ensure indicators still show strong momentum.
3. Enter on breakout: When price breaks above previous high (for longs) or below previous low (for shorts), enter.
4. Set stops: Below the recent swing low (for longs) or above the swing high (for shorts).

Real example: Regular Bearish Divergence

Suppose BTC is rallying strongly and hits a new high at $45,000 last week. Now it reaches $46,000, a new high, but:

• MACD or RSI does not reach a new peak
• This is a Regular Bearish Divergence

Strategy: Consider shorting when the price starts to reverse down, with a Stop Loss at $46,500.

Warning signs to watch

Divergence is not 100% reliable. Sometimes, multiple divergences occur without a trend change (called “fake divergence”). Always:

• Use divergence as part of your overall strategy
• Set Stop Losses, as the market may be stronger than it appears
• Use multiple indicators for confirmation
• In strong trending markets, Divergence may be less effective

Summary: Divergence is a tool, not the whole strategy

Divergence or Divergent signals are useful for predicting opportunities, but:

• Regular Divergence suggests a possible trend reversal
• Hidden Divergence indicates the trend may continue
• Always combine with risk management and overall trend analysis

If you want to try trading with a free demo account of $50,000, no commissions, free indicators, and a $100 bonus for new customers, you can start trading now.

Just understanding and correctly applying Divergence will give you an extra tool to improve your trading performance.