## Divergent Pattern in Trading: Understanding and Proper Application

In the trading world, technical signals are often crucial aids for traders. However, sometimes price and indicators do not move in the same direction, and this is where the term **Divergence** or in the context of a divergent pattern that is about to occur comes into play.

### Before Trading: Know Divergence Well

**Divergence is a situation where the price and indicator do not tell the same story**. If the price is moving in one direction but the indicator does not confirm that, it suggests that something may be mismatched.

This situation does not mean the indicator is faulty, but rather indicates that the current trend may be about to change or weaken. Recognizing how to read divergent patterns correctly will help traders choose the right entry points more effectively.

### Types of Divergence You Need to Know

#### 1. Regular Divergence – Trend Reversal Signal

**Regular Divergence indicates that the current trend is about to end**. When this appears, about 60-70% of the time, a price reversal follows.

- **Bullish Divergence**: Price makes lower lows but the indicator does not confirm the lower lows → Price is likely to reverse upward
- **Bearish Divergence**: Price makes higher highs but the indicator does not confirm the higher highs → Price is likely to reverse downward

#### 2. Hidden Divergence – Trend Continuation Signal

**Hidden Divergence predicts the opposite direction**. It indicates that the original trend has not yet finished.

- **Hidden Bullish Divergence**: Price makes a weak correction downward but the indicator still shows strong downward momentum → Downtrend will continue
- **Hidden Bearish Divergence**: Price makes a weak correction upward but the indicator still shows strong upward momentum → Uptrend will continue

### Indicators That Are Good for Reading Divergence Signals

#### MACD – The True Indicator of Divergent Pattern

MACD shows the momentum of the price through moving averages. When the price hits new highs/lows but MACD does not follow with new highs/lows, a divergent pattern has occurred.

#### RSI – Measuring Buying and Selling Pressure

RSI above 70 indicates overbought conditions, RSI below 30 indicates oversold conditions. When the price makes a new high but RSI does not make a new high → Bearish Divergence is occurring.

#### Williams Percent Range – Another Tool for Reading Divergence

%R above 80 indicates overbought, below 20 indicates oversold. Conflicts in this area can signal potential trend changes.

### How to Trade Divergence Effectively

#### How to Trade Regular Divergence (Reversal Play)

1. **Look for Higher Highs or Lower Lows on the price chart**. This pattern suggests the price is squeezing toward a turning point.

2. **Check if RSI or MACD makes Higher Highs or Lower Lows**. If not → conflicting signals appear.

3. **Wait for clear reversal signals**. For example, a candlestick pattern from overbought/oversold zones returning to the middle, or the price breaking a key level.

4. **Enter trades in the opposite direction**. If you see Bearish Divergence, consider selling; if Bullish Divergence, consider buying.

5. **Set tight Stop Losses**. Because divergence is not an infallible signal 100%.

#### How to Trade Hidden Divergence (Continuation Play)

1. **Look for Weak Higher Lows or Lower Highs**.

2. **Indicators still show strong signals**.

3. **Trade in the same trend direction**. Buy in an uptrend, sell in a downtrend.

4. **Profit targets** should be set wide, as the trend is likely to continue.

### Real Examples of Trading

#### Bullish Divergence During a Downtrend

Imagine Bitcoin drops multiple times, RSI drops below 30 (oversold), but as the price continues downward and makes a new low (Lower Low), RSI recovers and does not make a lower low (no Lower Low). This is a signal → the price may reverse upward soon.

When a large green candlestick appears, it’s a buying opportunity.

#### Bearish Divergence During an Uptrend

Ethereum’s price rises multiple times, RSI hits 70 (overbought), but as the price continues upward and makes a new high (Higher High), RSI does not go higher than before (no Higher High). This signals that the upward momentum may be waning.

When a red candlestick appears, it’s a selling opportunity.

#### Hidden Bullish Divergence in a Downtrend

Price gradually makes higher lows (Higher Low), creating a downward wave, MACD still makes new lows (Lower Low), indicating the downtrend may continue. You can consider shorting again.

#### Hidden Bearish Divergence in an Uptrend

Price gradually makes lower highs (Lower High), creating an upward wave, RSI makes new highs (Higher High), indicating the uptrend may continue. You can consider going long again.

### Caution: Divergence is not 100% certain

1. **False Signals**: Sometimes divergence appears but the price does not reverse. It can happen multiple times before a true reversal occurs.

2. **Wait for Confirmation**: Do not jump in immediately when divergence appears. Wait for the price to break a trendline or key level.

3. **Combine with Other Tools**: Divergent patterns work best when used with support/resistance, trendlines, or moving averages.

4. **Implement Good Risk Management**: Stop Losses should be tight. Not every divergence will lead to the expected move.

### Tips to Spot Divergence More Easily

- Use a timeframe of 4 hours or higher for clearer divergence signals.
- Check 2-3 indicators simultaneously, such as MACD + RSI + Stochastic. Divergence confirmed in multiple indicators is stronger.
- Draw Peak-to-Peak lines for the price and for indicators. If they are not parallel, divergence exists.
- Record observed patterns. Further analysis will reveal which divergence types work best in your market style.

### Summary: Divergence is a Tool, Not the Ultimate Weapon

Divergence and divergent patterns are reliable aids for traders, but they are not the ultimate answer for guaranteed profits. Their effectiveness depends on how deeply you understand them and how well you incorporate risk management.

**Practice trading with a virtual $50,000 for free**. No real risk involved. Train yourself to read divergence signals until you master them before starting real trading.