## Understanding Divergence: Contradictory Signals That Change Trading Directions

What is divergence? Simply put, it's "the price doing one thing, but the indicator showing another." A situation where the price and technical analysis tools are not in agreement. This is what we call divergence. It typically occurs when the current trend is weakening, and the market prepares for a reversal.

Tools used to detect divergence are mostly oscillator indicators such as MACD, RSI, or Williams %R. These programs help us see the strength of the price momentum. When the price and the indicator move in different directions, divergence occurs.

## Why is Divergence Important to Traders?

Divergence reveals market secrets—that is, the correlation between price movements and the underlying strength. When the price rises but momentum isn't keeping up, it signals that the rally may not be sustainable. Similarly, if the price drops but its strength diminishes, divergence warns that "be careful, the decline might stop soon."

Accurately spotting divergence allows traders to anticipate trend reversals before others or to hold positions longer before the price moves significantly.

## Two Types of Divergence Traders Need to Know

### Regular Divergence: Trend Reversal Signals

**Bullish Divergence** occurs when the price repeatedly makes new lows (Lower Low) but RSI or other indicators do not confirm a downtrend, showing weakness instead of new lows. This indicates sellers are tiring, and the downtrend is losing momentum. Soon, the price may reverse upward.

**Bearish Divergence** reflects a strong uptrend where the price makes new highs (Higher High) but MACD or RSI fail to follow, signaling that buyers who bought high are scared, and buying power is waning. Soon, the price may start to correct downward.

To trade regular divergence:
1. Wait for the price to reach overbought zone (RSI > 70) or oversold zone (RSI < 30).
2. Observe the indicator not making the same high/low, indicating divergence.
3. Watch for reversal candlestick signals (such as M or W patterns on the chart), then enter the trade.

### Hidden Divergence: The Concealed Predator

**Hidden Bullish Divergence** occurs during an ongoing uptrend when the price makes higher lows (Higher Low) but the indicator shows lower lows (Lower Low). This divergence suggests the trend is still strong, and the correction is just a pause. The trend is likely to continue upward.

**Hidden Bearish Divergence** happens during a downtrend when the price makes lower highs (Lower High) but MACD or other indicators show higher highs (Higher High). This indicates ongoing weakness, and the downtrend is not over yet. Traders should wait for the price to break out of its range before entering short or long positions accordingly.

For hidden divergence, wait for the price to break out of its range; if it breaks in the same direction, enter a long or short position following the trend.

## Popular Indicators for Detecting Divergence

**MACD** – The trend's nature. When the MACD moving averages are both positive and increasing, the trend is strong bullish; both negative and decreasing, the trend is strong bearish. When the price moves ahead but MACD weakens, divergence is present.

**RSI** – Momentum indicator. The higher the RSI, the more buying pressure; (> 70 = Overbought). The lower the RSI, the more selling pressure; (< 30 = Oversold). Divergence often appears in these zones.

**Williams %R** – Similar to RSI but with its own characteristics. Measures buying/selling strength. Overbought at %R > 80, oversold at %R < 20. Divergence in these zones is highly significant.

## Real Trading Examples

**Regular Bullish Divergence in a Downtrend**: Bitcoin's price drops to new lows, RSI enters oversold (< 30), but the price doesn't continue downward. Next, a long green candle appears. This is a buy signal. Place a stop loss slightly below the previous low.

**Hidden Bearish Divergence in a Downtrend**: Ethereum is declining, making lower highs (Lower High), but MACD still makes higher highs (Higher High). This contradiction indicates the downtrend isn't over yet. Wait for further decline and then enter a short position again.

## Caution for Traders

Divergence is not a magic arrow. It’s merely an indicator tool. Sometimes divergence signals appear multiple times before a significant move occurs. Traders should wait for price confirmation of reversal or continuation. Never enter trades without confirmation, always set a stop loss, and maintain a good risk-reward ratio.

Divergence works best in trending markets. In ranging markets (Ranging), signals can be misleading and produce false results. Combining divergence with other indicators like support/resistance levels or chart patterns is crucial.

## Summary

Divergence is the art of reading market sentiment. When the price and (momentum) are not aligned, it presents an opportunity for savvy traders. Understanding the difference between Regular Divergence (reversal signals) and Hidden Divergence (continuation signals) allows proper application. Profits will follow naturally, but traders must be cautious of risks and avoid rushing decisions.