Divergence occurs when price action and a technical indicator move in opposite directions. When price makes a new high but the indicator (like RSI or MACD) makes a lower high, momentum is weakening—a bearish divergence warning of potential reversal. Divergence is one of the most valuable signals for anticipating trend changes.
- Price and indicator moving in opposite directions
- Bullish divergence: lower price lows, higher indicator lows
- Bearish divergence: higher price highs, lower indicator highs
How Divergence Works
Divergence reveals hidden weakness or strength:
Bearish Divergence Example:
Price Action:
Peak 1: ₹100
Peak 2: ₹105 (higher high)
RSI Action:
Peak 1: 75
Peak 2: 65 (lower high)
Analysis:
Price is higher but momentum is weaker
Buyers struggling to maintain pace
Potential reversal ahead
Quick Reference: Divergence Types
| Type | Price | Indicator | Signal |
|---|---|---|---|
| Bearish | Higher high | Lower high | Potential top |
| Bullish | Lower low | Higher low | Potential bottom |
| Hidden Bearish | Lower high | Higher high | Downtrend continues |
| Hidden Bullish | Higher low | Lower low | Uptrend continues |
Example: Trading RSI Divergence
Bearish RSI Divergence:
| Point | Price | RSI | Analysis |
|---|---|---|---|
| Peak 1 | ₹200 | 78 | Overbought |
| Pullback | ₹185 | 55 | Normal correction |
| Peak 2 | ₹210 | 68 | Higher price, lower RSI! |
| Action | - | - | Divergence = warning |
| Result | ₹175 | 42 | Reversal followed |
Divergence occurs when price makes new extremes but momentum indicators don’t confirm. Bearish divergence (higher price, lower indicator) warns of tops. Bullish divergence (lower price, higher indicator) warns of bottoms. Use as warning, not standalone signal.
Types of Divergence
Regular Bearish
- Price: Higher high
- Indicator: Lower high
- Meaning: Uptrend weakening, potential reversal down
Regular Bullish
- Price: Lower low
- Indicator: Higher low
- Meaning: Downtrend weakening, potential reversal up
Hidden Bearish
- Price: Lower high
- Indicator: Higher high
- Meaning: Downtrend likely to continue
Hidden Bullish
- Price: Higher low
- Indicator: Lower low
- Meaning: Uptrend likely to continue
Divergence Indicators
RSI Divergence
Most popular. Compare price peaks/troughs with RSI peaks/troughs.
MACD Divergence
Compare price with MACD histogram or line peaks/troughs.
Stochastic Divergence
Similar to RSI, using stochastic oscillator.
OBV Divergence
Volume-based divergence—price up but OBV down shows distribution.
Trading Divergence
Entry Rules
- Wait for price confirmation (reversal candle)
- Enter on break of short-term support/resistance
- Don’t trade divergence alone
Stop Placement
- Stop beyond the divergence extreme
- Gives room for final spike before reversal
Best Contexts
- At key support/resistance levels
- After extended trends
- Multiple timeframe divergence
Common Mistakes
-
Trading divergence immediately – Divergence can persist. Wait for price confirmation.
-
Missing the trend – Divergence against a strong trend is risky.
-
Wrong timeframe – Higher timeframe divergence is more reliable.
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Ignoring hidden divergence – Hidden divergence signals trend continuation, not reversal.
How JournalPlus Tracks Divergence
JournalPlus lets you tag divergence conditions at entry, tracking whether divergence-based trades outperform other setups.
