What Is Divergence?
Divergence originates from the Latin word divergere, meaning "to detect a disagreement." In trading, it refers to a discrepancy between price movements and technical indicators.
Key Insights:
- Divergence signals potential reversals or trend continuations.
- Commonly used indicators: RSI, MACD, Stochastic, and OBV.
- Works across stocks, forex, futures, and cryptocurrencies.
Types of Divergences
1. Regular Bearish Divergence
- Price: Higher highs.
- Indicator: Lower highs.
- Implication: Potential downward reversal.
2. Hidden Bearish Divergence
- Price: Lower highs.
- Indicator: Higher highs.
- Implication: Continuation of a downtrend.
3. Regular Bullish Divergence
- Price: Lower lows.
- Indicator: Higher lows.
- Implication: Potential upward reversal.
4. Hidden Bullish Divergence
- Price: Higher lows.
- Indicator: Lower lows.
- Implication: Continuation of an uptrend.
Trading Strategies
Spotting Divergences
- Use oscillators (e.g., RSI, MACD) to identify mismatches.
- Confirm with support/resistance levels or volume analysis.
Example:
On a 5-minute EUR futures chart:
- New price highs (bullish) + declining RSI highs (bearish) = Regular Bearish Divergence.
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Advantages vs. Disadvantages
| Pros | Cons |
|------------------------------------|-----------------------------------|
| Simple to identify | Indicator-dependent (false signals)|
| Works in all markets | Ignores volume data |
| Early trend-strength signals | Requires confirmation |
Enhancing Accuracy with Cluster Charts
Why Combine Both?
- Cluster charts reveal order flow and liquidity levels.
- Divergence highlights momentum shifts.
Case Study: Gold Futures
- Price: Higher peak.
- OBV Indicator: Lower peak (Bearish Divergence).
- Cluster Data: Green clusters (buy pressure) failed to push prices up, confirming seller dominance.
FAQs
Q1: Can divergence alone guarantee profitable trades?
A: No—always confirm with volume, price action, or cluster analysis.
Q2: Which indicator is best for divergence trading?
A: RSI and MACD are popular, but OBV (volume-based) reduces false signals.
Q3: How do hidden divergences differ from regular ones?
A: Hidden divergences predict trend continuation; regular divergences signal reversals.
👉 Master cluster chart analysis
Key Takeaways
- Divergences warn of trend weakness but require confirmation.
- Pair with cluster analysis for higher-probability trades.
- Avoid relying solely on indicators—incorporate volume and price action.
Ready to test these strategies? 👉 Explore free trading tools
Final Note: Divergence trading improves with practice and complementary tools. Always backtest strategies before live execution.