Divergence Secrets

📌 What is Divergence?
Divergence occurs when the price action of a security moves in the opposite direction of a technical indicator or momentum oscillator.

There are two main types:

Regular Divergence – Signals potential reversal

Hidden Divergence – Signals trend continuation

🔍 1. Regular Divergence (Reversal Signal)
Occurs when:

Price makes a higher high, but the indicator makes a lower high (bearish divergence)

Price makes a lower low, but the indicator makes a higher low (bullish divergence)

✳️ Example:
Bearish divergence: Price is rising, but RSI is falling → Possible upcoming downtrend.

Bullish divergence: Price is falling, but MACD is rising → Possible upcoming uptrend.

This tells you the momentum is weakening, even though price appears strong.

🔍 2. Hidden Divergence (Trend Continuation)
Occurs when:

Price makes a higher low, but the indicator makes a lower low → Bullish hidden divergence

Price makes a lower high, but the indicator makes a higher high → Bearish hidden divergence

Hidden divergence shows that momentum is aligning with trend direction and suggests continuation.

📈 Indicators to Spot Divergence
RSI (Relative Strength Index)

Best for spotting overbought/oversold and divergences.

MACD (Moving Average Convergence Divergence)

Great for visualizing momentum divergence.

Stochastic Oscillator

Good for short-term divergence.

On-Balance Volume (OBV)

Helps spot divergence using volume behavior.

CCI (Commodity Channel Index)

🔐 Institutional Secret: Volume Divergence
Institutions look for divergence between price and volume:

Price making higher highs but volume falling? Institutions might be distributing (smart money exiting).

Price making lower lows but volume rising? Could be accumulation.

This is often missed by retail traders!

✅ How to Trade Divergence (Checklist)
🔸 Entry Strategy:
Wait for divergence confirmation on a strong indicator (RSI/MACD)

Use candlestick reversal patterns near divergence zones

Align with support/resistance or trendlines

🔸 Stop-Loss:
Always place below/above recent swing low/high (depending on long or short)

🔸 Take-Profit:
Use Fibonacci levels, previous structure, or trend-based targets

⚠️ Common Mistakes
Trading divergence without price confirmation

Forcing divergence on weak or flat trends

Ignoring higher timeframe context

Using only one indicator

Always confirm with price structure, volume, and multi-timeframe analysis.

🎯 Pro Tip: Combine with Institutional Tools
Use Order Blocks + Divergence = Strong reversal signal

Combine Liquidity Zones + Divergence = Catch smart money traps

Divergence + Imbalance zones = Laser-precise entries.