Divergence occurs when the price of an asset moves in the opposite direction of a technical indicator, such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD). This phenomenon suggests that the current price trend is losing momentum and may be nearing a reversal.
Regular bullish divergence happens when price makes a lower low, but the indicator makes a higher low. This signals potential upward momentum. Regular bearish divergence occurs when price makes a higher high, but the indicator makes a lower high. This indicates weakening buying pressure and potential downward movement.
Hidden divergence acts as a continuation signal. Hidden bullish divergence appears when price makes a higher low, while the indicator makes a lower low. Hidden bearish divergence occurs when price makes a lower high, while the indicator makes a higher high. These patterns suggest the prevailing trend remains intact.
Divergence is not a standalone signal. Traders often combine these patterns with support and resistance levels or volume analysis to confirm setups. Trading involves substantial risk, and indicators can produce false signals. Always implement risk management strategies, such as stop-loss orders, to protect capital when trading based on technical patterns.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.