Divergence

Divergence is when the price and the oscillator form a bottom in opposite directions. There are two types of Divergence, Normal and Hidden. The indicators used to determine Divergence are MACD, RSI, Stochastic, CCI, ...

Classification of regular and hidden divergences

Divergence usually has 2 types of price increases and decreases. Inside:

A bearish divergence occurs when the price makes a higher high but the oscillator makes a lower high, as shown below:


The bullish regular part occurs when the price makes a lower low, but the oscillator creates a higher low, as shown below:


The part hidden period also has 2 types of price increase and decrease. Inside:

The bearish divergence occurs when the price makes a lower high but the oscillator makes a higher high, as shown below:


The bullish streak occurs when the price creates a higher low, but the oscillator creates a lower low, as shown below:


Dew on how to distinguish these two types of divergence for you. And now we get to the main content.

6 Important principles when determining divergence:

  1. Divergence signals don't work well in a sideways or trending market.
  2. Do not use divergences to find entry points but should be combined with price action to get more standard entry points.
  3. There is always a possibility of being wrong. No divergences are 100% accurate. Because of trading execution, you should adhere to the trading rules.
  4. Do not identify divergences based on candlesticks during news, because during that time market volatility can be high, price action will have a lot of noise.
  5. Divergence must be clear. Not only can you notice this signal, but many other traders also notice it.
  6. Analyze only the nearest bottom. Because assuming you use the MACD to determine divergences, a zero-line crossover in the MACD could be a signal of a trend change, making the divergence less strong.