Bullish Divergence and Bearish Divergence: Hidden Opportunities in Technical Analysis

“Lying” Signals in the Market

In trading, have you ever encountered this situation: the price keeps falling, but the indicator doesn’t confirm the downward momentum? Or the price is rising, but the indicator starts to weaken? This is the core of Divergence — when price movement and technical indicators are out of sync.

Divergence is not a malfunction of the indicator but a strong market signal: the current trend’s momentum may be waning. As a trader, learning to recognize and utilize this signal is like holding a tool to predict trend reversals.

The Essence of Divergence: Early Warning of Momentum Deterioration

Divergence occurs in two scenarios:

Scenario 1: Price makes a new high/new low, but the indicator doesn’t follow

When the price continues upward, creating higher highs, but RSI, MACD, or other momentum indicators weaken, making lower lows, a contradiction arises. This indicates sellers are gradually stepping in, and the strength of the uptrend is diminishing. This is a classic Bearish Divergence — a warning sign.

Conversely, if the price keeps falling but the indicator shows weakening momentum, it signals a Bullish Divergence — a potential reversal opportunity.

Scenario 2: Price highs/lows stabilize, but indicators still show strength

This is Hidden Divergence, which does not signal a reversal but suggests trend continuation. When the price shows weaker swings (like lower highs or higher lows), but the indicator remains strong, it indicates the main trend is likely to continue.

Three Key Indicators for Identifying Divergence

MACD: Trend Follower

MACD consists of two lines reflecting changes in price momentum. When MACD is positive and expanding, the uptrend is strong; when negative and shrinking, the downtrend weakens.

Application: When the price hits a new high but MACD peaks decline, it’s a typical bearish divergence signal, hinting that upward momentum is waning.

RSI: Overbought/Oversold Indicator

RSI ranges from 0-100. Above 70 indicates overbought, below 30 indicates oversold.

Key points:

• RSI above 70 but price still rising → possible bearish divergence
• RSI below 30 but price still falling → possible bullish divergence

When the indicator and price are out of sync, it signals a potential reversal.

Williams %R: Another Overbought/Oversold Indicator

%R ranges from 0-100, above 80 is overbought, below 20 is oversold. Its working principle is similar to RSI but calculated differently, sometimes capturing divergence signals RSI misses.

Two Main Types of Divergence and Trading Applications

First Type: Regular Divergence — Trend Reversal Signal

Bullish Divergence: Downtrend Will Stop

Definition: Price makes a new low, but the indicator (like RSI) does not make a new low and instead rises.

When it appears: Usually at the end of a downtrend, especially when RSI enters oversold territory (below 30).

Trading Strategy:

1. Observe if the price forms a double bottom or lower lows
2. Check if RSI, MACD, etc., show divergence
3. When a clear bullish candlestick pattern (like a hammer) appears, it’s a buy signal
4. Set stop-loss below the recent low
5. Enter after divergence confirmation

Practical Tip: Don’t rush to buy. Even if bullish divergence appears, wait for the price to confirm a rebound before acting.

Bearish Divergence: Uptrend About to End

Definition: Price makes a new high, but the indicator does not, or starts weakening.

When it appears: Usually when an uptrend is about to reverse, especially when RSI enters overbought territory (above 70).

Trading Strategy:

1. Identify higher highs in price
2. Check if MACD, RSI show lower highs
3. When a clear bearish signal (like shooting star) appears, consider shorting
4. Set stop-loss above the recent high
5. Target support levels

Practical Tip: Bearish divergence often occurs at tops repeatedly, and multiple signals may be needed before a true reversal. Risk management is crucial.

Second Type: Hidden Divergence — Evidence of Trend Continuation

Hidden Bullish Divergence: Uptrend Will Continue

Features: Price pulls back during an uptrend, making higher lows, but RSI makes lower lows.

Implication: Although the price is correcting, momentum remains strong. This suggests the decline is just a correction, and the main uptrend is intact.

Trading Application:

1. Recognize the overall uptrend structure
2. Observe divergence during pullbacks
3. When price breaks previous highs, it’s a continuation entry point
4. Set stop-loss below recent lows
5. Use this signal to follow the upward trend

Hidden Bearish Divergence: Downtrend Will Persist

Features: Price rebounds during a downtrend, making lower highs, but the indicator makes higher highs.

Implication: The rebound is a technical retracement, and the main downtrend remains strong.

Trading Application:

1. Confirm the downtrend structure
2. Observe divergence during rebounds
3. When price breaks previous lows, it confirms a short entry
4. Set stop-loss above recent highs
5. Use this signal to short the trend

Practical Case Analysis

Scenario 1: Typical Bullish Divergence

A certain coin experiences a sharp decline, RSI drops into oversold (below 30). During the decline, the price forms two lower bottoms, but the RSI at the second bottom is higher than at the first. This contradiction is bullish divergence.

Operation: Enter long after a confirmed green candle, set stop-loss 2% below the second bottom, and target key resistance levels.

Scenario 2: Hidden Bullish Divergence Example

A coin in an uptrend pulls back. The price makes a higher low, but RSI makes a lower low, indicating that although technically correcting, the downward momentum is waning, and a rebound is imminent.

Operation: Wait for the price to break the correction high, use the breakout as an entry point, and set stop-loss below the correction low.

Three Major Risks When Using Divergence

Risk 1: False signals occur frequently

Divergence can appear multiple times without triggering an immediate reversal, causing traders to be repeatedly stopped out. Solution: combine with more confirmation signals like candlestick patterns, support/resistance.

Risk 2: Different indicators give conflicting signals

MACD shows divergence but RSI does not. In such cases, wait for clearer confirmation rather than rushing into trades.

Risk 3: Ignoring the overall trend

In a strong uptrend, even if bearish divergence appears, the trend may still continue. Always respect the dominant trend.

Final Advice

Divergence is a powerful tool but not a “magic key.” It’s best used in conjunction with:

• Support and Resistance levels: More reliable at key points
• Candlestick patterns: Wait for confirmation of reversals
• Trendlines: Respect overall trend direction
• Risk management: Always set proper stops and position sizes

A true trading expert doesn’t blindly buy on bullish divergence but treats it as a “signal worth noting,” confirmed through multiple validations. Only then can you avoid missing opportunities and prevent frequent pitfalls.

Remember, the market will test your patience time and again. Learning to wait for confirmation is already a victory over most traders.