Divergence occurs when the price of an asset moves in the opposite direction of a technical indicator, such as the RSI or MACD. It is one of the most powerful signals available to technical traders.
Types of Divergence
There are two primary categories: Regular and Hidden.
1. Regular Divergence
Regular divergence is used to signal a potential trend reversal. If price makes a lower low but the oscillator makes a higher low (Bullish Regular Divergence), it suggests the downward momentum is fading.
2. Hidden Divergence
Hidden divergence is used to signal trend continuation. It suggests that the current trend is still strong despite a temporary pullback in price.
Trading with Precision
To use divergence accurately, always wait for confirmation from price action, such as a candlestick pattern (pin bar or engulfing candle) at a key level of support or resistance.