Divergence
Family VI · Charts & indicators
Not to be confused with rsi, macd, trend reversal.
Divergence is a comparison between the direction of price and the direction of an indicator computed from that price, most often an oscillator such as RSI, MACD or stochastic. It is described as regular (classic) when the two series disagree at successive extremes, and as hidden (reverse) when they disagree at successive corrections within a trend. Divergence is an observation about the relationship between two plotted lines, not a signal that price must reverse.
Regular and hidden forms
Two pairings are conventionally named.
- Regular bearish: price makes a higher high while the indicator makes a lower high. It is read as weakening upward momentum.
- Regular bullish: price makes a lower low while the indicator makes a higher low. It is read as weakening downward momentum.
- Hidden bearish: price makes a lower high while the indicator makes a higher high, occurring within a downtrend.
- Hidden bullish: price makes a higher low while the indicator makes a lower low, occurring within an uptrend.
Each form requires two comparable extremes, so the interval between them, the indicator settings and the timeframe all affect whether the pattern is present.
Worked example
An oscillator is read on a 14-period setting. Two swing highs in price are compared with the oscillator values at those same bars.
The comparison is between the two readings, not between the oscillator and a fixed threshold; an oscillator can be overbought without any divergence existing.
Interpretation and limits
Divergence describes a difference in the slopes of two series. It does not specify when, or whether, price will change direction, and a series can diverge repeatedly while a trend continues. The pattern depends on which extremes are selected, so shifting the lookback window or the indicator period can create or remove it. Confirmation is normally sought from price structure, such as a break of a prior swing, rather than from the divergence alone.
Often confused with
- rsi
- RSI (Relative Strength Index) is a bounded momentum oscillator, scaled from 0 to 100, that compares the average size of recent gains with the average size of recent losses over a chosen lookback period.
- macd
- MACD is a trend-following momentum indicator that subtracts a longer-period exponential moving average from a shorter-period one, then plots a signal line and a histogram around it.
- trend reversal
- A trend reversal is a change in the direction of a market's prevailing price trend, from up to down or down to up, confirmed when price breaks a significant prior structure such as a swing high, swing low or trend line.
See also
- forex technical analysis indicators
- price action
- fundamental analysis
- support and resistance
- technical analysis
- fibonacci