Divergence Trading
Overview
Divergence occurs when price action and an indicator (RSI, MACD, CCI, OBV) move in opposite directions, signaling weakening momentum and potential reversals. Regular divergence signals reversal. Hidden divergence signals continuation. Divergence is a leading signal — it warns of momentum shifts before they appear in price.
Key Concepts
Regular bullish divergence: price makes lower low, indicator makes higher low (reversal up). Regular bearish divergence: price makes higher high, indicator makes lower high (reversal down). Hidden bullish divergence: price makes higher low, indicator makes lower low (continuation up). Hidden bearish divergence: price makes lower high, indicator makes higher high (continuation down).
Entry Signals
Regular divergence at a key S/R level = high-probability reversal, Multiple indicators confirming divergence = stronger signal, Divergence spanning 5-20 candles is most reliable, Hidden divergence within a trend for continuation entries
Exit Signals
Enter on price confirmation after divergence (not on the divergence itself — wait for a reversal candle or structure break). Stop beyond the divergence extreme. Target the prior swing or key S/R level.
Best Timeframes
4H and Daily produce the most reliable divergence signals
Pro Tips
Divergence is a warning, not a signal. Price can continue making new extremes while the indicator diverges for an extended period. This is called 'extended divergence' and can persist through powerful trends. Always use price action confirmation.
More Topics in This Category
Multi-Timeframe Analysis
Multi-timeframe analysis (MTA) uses multiple chart timeframes to build a complete picture of market conditions. The higher timeframe provides trend direction and key levels. The intermediate timeframe confirms momentum. The lower timeframe provides precise entry timing. This 'top-down' approach dramatically improves trade quality.
Bollinger Bands
Bollinger Bands consist of a middle band (20 SMA by default) and upper/lower bands set at 2 standard deviations from the middle. The bands expand during high volatility and contract during low volatility. The squeeze (narrow bands) often precedes a significant move, making Bollinger Bands excellent for volatility-based setups.
Supply & Demand Zones
Supply and demand zones are price areas where significant buying or selling previously occurred, causing a strong directional move away from the zone. Unlike traditional support and resistance which uses lines, supply and demand trading identifies zones — ranges of price — where institutional orders created imbalances. When price returns to these zones, unfilled orders may trigger a reaction, providing high-probability trading opportunities.
Support & Resistance Levels
Support and resistance (S/R) levels are price zones where buying or selling pressure has historically prevented the price from continuing in its current direction. Support is a floor where buying emerges; resistance is a ceiling where selling appears. S/R levels are the foundation of technical analysis and provide the framework for every trade setup.