Divergence Trading Step by Step
Divergence means the gap between price and an indicator, and it’s one of the most useful tools for spotting a signal that price may be about to change direction. Not every gap between an indicator and price means there is a divergence or that a reversal is coming. It helps to understand Technical Indicators for Simpler.
Divergence is one of the most widely used trading concepts. When applied correctly, it provides trading signals you can rely on, regardless of which indicator you use it with.
You can use RSI, CCI, the Stochastic indicator, the MACD, and others — divergence lets you enter a trade with more confidence and reliability. You can also use candlestick patterns and learn more about price action, which gives you a stronger entry point.
Combining divergence with harmonic patterns is one of the strongest confirmation tools for a trend change from a pattern’s reversal zone.
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There Are Two Types of Divergence
Did you know there’s a technique for spotting buying opportunities near the bottom or selling opportunities near the top of a trend? That sounds useful, doesn’t it? Divergence is what makes that possible.
Normally, price and the indicator move together. That means if price is making higher highs, the indicator should be making higher highs too; if price is making lower lows, the indicator should be making lower lows too.
If that doesn’t happen, it means price and the indicator are moving apart from each other, and that’s what we call divergence.
Divergence is the situation where price is at a higher level, but the indicator you’re using is at a lower level.
In short, if your indicator disagrees with price action, that’s a divergence.
Divergence is a useful way to read signals, and it’s worth learning how to use it in your trading.
The First Type: Regular Divergence
Regular divergence splits into regular positive (bullish) divergence and regular negative (bearish) divergence.
Regular Positive (Bullish) Divergence
This is when the indicator starts forming higher lows while price starts forming lower lows (buy).
When price makes a lower low, but the indicator is forming higher lows, this is called regular positive (bullish) divergence.
This divergence happens in a downtrend. Price may rise after making its second low while the indicator makes a higher low.
You can see positive (bullish) divergence in the image below.
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Regular Negative (Bearish) Divergence
This is when the indicator starts forming lower highs while price starts forming higher highs (sell).
When price reaches a higher high, but the indicator is forming lower highs, this is called regular negative (bearish) divergence.
This divergence happens in an uptrend. Price is expected to reverse and fall after it reaches a second higher high while the indicator makes a lower high.
As you can see in the image below, price reversed after making the second high.
The Second Type: Hidden Divergence
Just as divergence can point to a possible trend reversal, it can also point to trend continuation — meaning price keeps moving in its current direction.
Note that hidden divergence helps you get a signal that the trend will continue, which is useful information.
Divergence splits into positive (bullish) divergence and negative (bearish) divergence.
Hidden Positive (Bullish) Divergence
This is when the indicator starts forming lower lows while price starts forming higher lows (buy).
This happens when price is making higher lows, but the indicator is making lower lows. This can be seen when price is in an uptrend.
This means price is likely to keep rising and continue the uptrend. You can see hidden positive divergence in the image below.
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Hidden Negative (Bearish) Divergence
This is when the indicator starts forming higher highs while price starts forming lower highs (sell).
This happens when price is making lower highs, but the indicator is making higher highs. You can easily tell that negative hidden divergence is occurring in a downtrend.
You can expect price to keep falling and continue the downtrend when you see negative hidden divergence.
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What’s the Difference Between Regular and Hidden Divergence?
The answer is that regular divergence gives potential signals of a trend reversal, while hidden divergence signals trend continuation. It takes some time to spot divergence on a chart.
Also note that divergence isn’t a signal to enter a trade on its own — you should use it as an indicator.
Because there are plenty of false signals, it isn’t wise to trade based on divergence alone. It’s not a 100% guarantee, but when used as a setup condition combined with additional confirmation tools, it can help keep risk to a minimum.
Divergence doesn’t show up very often, but when it does, it deserves close attention — it can help you catch a significant move when the trend changes.
Hidden divergence can help you stay positioned correctly within the trend instead of exiting early.
One distinction matters here: divergence appears when price and the indicator show the trader different price action, while confirmation is when the indicator and price — or multiple indicators — show the trader the same price action. Traders look for confirmation before entering trades: if price is moving up, they want their indicators to suggest that move is likely to continue.
As with all forms of technical analysis, traders should use a combination of indicators and analysis methods to confirm a trend reversal before acting on divergence alone, since divergence won’t be present for every price reversal — so another form of risk control or analysis should be used alongside it.
When a gap appears between the indicator and the chart, that doesn’t mean price will reverse or that a reversal is imminent. The gap can persist for a long time, so acting on it alone, without confirmation, can mean significant losses.
Summary table: divergence types in trading and their signals
| Type | Price Behavior | Indicator Behavior | Signal |
|---|---|---|---|
| Bullish Divergence | Downtrend / lower lows | Higher lows | Buy |
| Bearish Divergence | Uptrend / higher highs | Lower highs | Sell |
| Hidden Bullish Divergence | Uptrend / higher lows | Lower lows | Buy continuation |
| Hidden Bearish Divergence | Downtrend / lower highs | Higher highs | Sell continuation |
Frequently Asked Questions
What is divergence in forex trading?
It’s one of the most important technical analysis signals. It means the asset’s price is moving in the opposite direction to a technical indicator — for example, when the asset price is trending up while an oscillator is trending down, or vice versa. Its importance lies in acting as a signal for a possible trend reversal in forex.
How do you use divergence in trading?
First you need to confirm the divergence signal with other technical signals, since it isn’t decisive on its own for entering trades. Using it requires knowing all the types of divergence, or at least focusing on the main type that helps identify a trend reversal. You should also start from the price chart itself.
How do you use divergence in trading?
Divergence in trading points to a reversal or correction that’s expected to happen, when the indicator moves opposite to price.
Is divergence a good trading strategy?
Divergence is a useful trading method, but it shouldn’t be used alone — it should be combined with other technical analysis tools such as support and resistance or trendlines.
Is divergence good for stocks?
Divergence appearing on a stock’s chart signals that a move against the current trend may occur, whether as a correction or a full reversal.
Related reading:
The Butterfly Pattern — Identifying the End of a Trend Move
The Crab Pattern
The Shark Pattern
The 0-5 Pattern
Fibonacci Ratios: Explaining Fibonacci Price Retracement Levels
Advantages and Disadvantages of Harmonic Patterns
Disclaimer: This article is for educational purposes only and is not investment advice. Trading forex, CFDs, and other leveraged products carries a high level of risk and may not be suitable for every investor; you can lose more than your initial deposit. Chart patterns such as divergence do not guarantee future results. Some links on this site are affiliate links, meaning EasyTradeWeb may earn a commission if you open an account through them, at no extra cost to you.
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