TRADING GLOSSARY

Divergence: when price and indicators disagree

Divergence occurs when the price of an asset moves in one direction while a technical indicator moves in the opposite direction. This disagreement between price and indicator often signals that the current trend is weakening and a reversal may be approaching.

Regular divergence

Bullish regular divergence: Price makes a lower low, but the indicator (typically RSI or MACD) makes a higher low. This suggests that selling pressure is diminishing despite the price continuing to fall. It often precedes a reversal to the upside.

Bearish regular divergence: Price makes a higher high, but the indicator makes a lower high. This suggests that buying pressure is weakening despite the price continuing to rise. It often precedes a reversal to the downside.

Hidden divergence

Bullish hidden divergence: Price makes a higher low, but the indicator makes a lower low. This occurs in uptrends and suggests the trend will continue higher after a pullback.

Bearish hidden divergence: Price makes a lower high, but the indicator makes a higher high. This occurs in downtrends and suggests the trend will continue lower after a bounce.

How to trade divergence

Divergence is a warning signal, not a trade trigger. The best approach is to wait for price action confirmation after spotting divergence. For bullish divergence, wait for a bullish candlestick pattern or a break above a short-term resistance level. For bearish divergence, wait for a bearish candlestick pattern or a break below short-term support.

The most reliable divergence signals come from the RSI (14 period) and MACD histogram on daily or higher timeframes. Shorter timeframes produce more false signals. AskTrade’s Technical Analysis Agent automatically identifies divergence across all indicators and timeframes.

Disclaimer: This is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss.

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AskTrade analyses are AI-generated and do not constitute financial advice.