Divergence Examples. Cheat Sheet

Understanding Divergence: Examples and Guidelines

 

Divergence is a powerful tool for predicting potential trend changes. Let’s review the main types of divergence to help you utilize them effectively in your trading.

Types of Divergence

1.Regular Divergence:

Indicates a potential reversal of the current trend.

2.Hidden Divergence:

Confirms the continuation of the current trend, often appearing during corrections.

 

Each type of divergence can be bullish (indicating an upward move) or bearish (indicating a downward move).

Examples of Divergence

 

Example 1: Regular Bullish Divergence

•Price: A lower low compared to the previous low.

•Oscillator: A higher low compared to the previous low.

•Description:

Indicates hidden strength in the market. Sellers are losing control, signaling a potential upward trend.

Example 2: Regular Bearish Divergence

•Price: A higher high compared to the previous high.

•Oscillator: A lower high compared to the previous high.

•Description:

Signals hidden weakness in the market. Buyers are losing momentum, potentially leading to a downward trend.

Example 3: Hidden Bullish Divergence

•Price: A higher low compared to the previous low.

•Oscillator: A lower low compared to the previous low.

•Description:

Confirms the strength of an uptrend. It usually forms during corrections, providing an excellent entry signal for trend continuation.

Example 4: Hidden Bearish Divergence

•Price: A lower high compared to the previous high.

•Oscillator: A higher high compared to the previous high.

•Description:

Indicates weakness in a downtrend. It often appears during corrections and signals the continuation of a bearish trend.

How to Use Divergences Effectively?

1.Identify the Trend:

Determine the market’s condition—uptrend, downtrend, or range-bound.

2.Choose an Oscillator:

Use indicators like RSI, MACD, or Stochastic.

3.Confirm the Signal:

Wait for the price and the oscillator to show divergence before entering a trade.

4.Combine with Other Tools:

Enhance your analysis by pairing divergence with support and resistance levels, Price Action patterns, or additional indicators.

Recommendation:

 

Divergence works across all financial markets, including Forex, stocks, and cryptocurrencies. To succeed, practice on a demo account and study historical divergence signals.

 

Bookmark this page for a quick reference on divergence examples and tips. Happy trading!