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.
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).
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
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.
4H and Daily produce the most reliable divergence signals
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.
Fibonacci retracements identify potential support and resistance levels by measuring the percentage pullback of a prior price swing using key Fibonacci ratios: 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These levels often coincide with where pullbacks within trends tend to find support or resistance, making them essential for entry timing.
Chart patterns are geometric price formations that signal continuation or reversal. Major patterns include: Head & Shoulders (reversal), Double Top/Bottom (reversal), Bull/Bear Flags (continuation), Rising/Falling Wedges (reversal), Ascending/Descending Triangles (continuation/reversal). All are measured-move patterns with projected price targets.
The Moving Average Convergence Divergence (MACD) measures the relationship between two exponential moving averages (typically 12 and 26 period). The MACD line is the difference between these EMAs, and the signal line is a 9-period EMA of the MACD. The histogram shows the distance between MACD and signal lines. MACD is a hybrid trend-following and momentum indicator.
Gaps occur when price opens significantly above or below the prior close, leaving an unfilled space on the chart. Gap trading strategies exploit the tendency for gaps to either fill (price returning to close the gap) or continue (price extending in the gap direction). Understanding gap types — common, breakaway, runaway, and exhaustion — helps traders determine whether to fade the gap or trade its continuation.