Divergence

Bearish divergence occurs when the price forms a higher high while a technical indicator, such as the RSI or MACD, forms a lower high, indicating underlying weakness in bullish momentum despite the price appearing to rise. Conversely, bullish divergence occurs when the price forms a lower low while the indicator prints a higher low, signaling waning selling pressure and a potential upward rebound.

Divergence is considered one of the most critical early warning signals of a potential trend reversal, as it reveals a discrepancy between visible price action and the underlying momentum driving it—something not typically apparent from reading price alone. It is most commonly used with momentum oscillators such as the RSI, MACD, and Stochastics.

There is also a less common type known as hidden divergence, which serves as a trend continuation signal rather than a reversal signal. In an established uptrend, it occurs when the price makes a higher low while the indicator makes a lower low, supporting the continuation of the advance.

A common mistake is entering a trade immediately upon spotting a divergence without waiting for additional confirmation, such as a break of support or resistance or the formation of a reversal candlestick pattern. Divergences can persist for a relatively long time before ultimately translating into an actual price reversal.