Divergence Trading: Spotting Reversals Before They Happen
Divergence between price and indicators signals fading momentum. Learn to spot regular and hidden divergence for early reversal detection. RSI and MACD.
What Is Divergence?
Divergence occurs when price and an indicator move in opposite directions. Price makes a new high but the indicator makes a lower high — the momentum behind the move is weakening. This often precedes a reversal.
Regular Divergence (Reversal Signal)
- Bullish: Price makes a lower low, but RSI/MACD makes a higher low — downtrend losing momentum, reversal up likely
- Bearish: Price makes a higher high, but RSI/MACD makes a lower high — uptrend losing momentum, reversal down likely
Hidden Divergence (Continuation Signal)
- Bullish: Price makes a higher low, but RSI/MACD makes a lower low — pullback is weak, trend likely to continue up
- Bearish: Price makes a lower high, but RSI/MACD makes a higher high — rally is weak, trend likely to continue down
Trading Divergence
(1) Identify divergence on 4H or Daily — lower timeframes produce too much noise. (2) Wait for a reversal candle at a support/resistance level. (3) Enter on the candle close. (4) Stop: beyond the divergence extreme. (5) Target: the nearest key level or 161.8% Fibonacci extension of the last swing.
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70-80% of retail investor accounts lose money when trading CFDs. Backtesting does not guarantee future results. Always consider whether you can afford the potential loss of your capital.