Divergence

When the arrows don't match

Most of the time, price and momentum indicators move together. Price makes a new high, RSI makes a new high too. But sometimes they disagree. That's called divergence.

Think of a kid running up a hill. Each step is still higher than the last, but he's getting slower and puffing harder. He's still climbing, but his push is fading. That's what divergence shows.

Bearish divergence (near a top)

• Price makes a higher high.
• RSI (or MACD, or Stochastic) makes a lower high.

With numbers: price peaks at $50, pulls back, then climbs to a new peak at $52. But RSI was 78 at the first peak and only 66 at the second. Price went higher with less push behind it. Buyers may be getting tired.

Bullish divergence (near a bottom)

The mirror image:

• Price makes a lower low.
• The indicator makes a higher low.

With numbers: price drops to $30, bounces, then falls to a new low at $28. But RSI was 22 at the first low and 35 at the second. Price went lower, but sellers pushed with less force.

How to spot it

1. Find two clear peaks (or two clear dips) on the price chart.
2. Draw a line connecting them. Does it point up or down?
3. Look at the indicator directly below those same two candles, and connect its peaks (or dips).
4. If the two lines point in different directions, you've found divergence.

Always compare the same candles. Matching price's peak to some random wiggle in the indicator is a very common mistake.

How traders use it

Divergence is a warning, not a signal to act. It says, "This move is losing steam." Traders often wait for price itself to agree before believing it: for example a break of a trendline or a support level, or a strong reversal candle like the ones from the Roots level.

Where it fails

Momentum can fade for a long time without price turning. A strong trend can show divergence two, three or four times in a row while it keeps going, and each "this is the top" guess loses. Sometimes divergence only means price slowed down to rest. The tired runner catches his breath and keeps climbing.

Remember

• Divergence means price and an indicator point different ways.
• Bearish: price makes a higher high, the indicator a lower high. Bullish: price makes a lower low, the indicator a higher low.
• It's a warning that the push is fading, not a promise of a turn.
• Strong trends can show divergence many times and keep going.