What is Divergence?

What is Divergence?

Divergence occurs when price moves in one direction while an indicator moves in the opposite direction, signaling potential trend exhaustion.

Types of Divergence

• Bullish divergence: Price makes lower lows while the indicator forms higher lows.
• Bearish divergence: Price makes higher highs while the indicator forms lower highs.
• Hidden divergence: Supports trend continuation when corrective moves diverge.
• Indicator choice: RSI, MACD, and stochastic oscillators are common tools.

Applying Divergence

• Timeframe alignment: Validate on higher timeframes before trading lower ones.
• Combine with structure: Divergence near key levels is more meaningful.
• Risk management: Place stops beyond recent extremes to allow room for reversals.
• Avoid overuse: Not every divergence leads to a reversal; wait for confirmation.

Practical Playbook

• Define context on higher timeframes, then execute on intraday charts.
• Wait for confirmation (acceptance, momentum, or confluence) before entry.
• Size positions conservatively and place stops at clear invalidation levels.
• Adapt to session dynamics; conditions shift between Asia, London, and New York.

Common Pitfalls

• Forcing trades without alignment across timeframe, structure, and catalyst.
• Ignoring spreads/slippage during news or thin liquidity.
• Moving stops or adding to losers instead of honoring the plan.

Illustrative Example

Build a simple playbook: identify bias, mark key zones/levels, define triggers and invalidation, and pre‑set targets for 2–3R. Journal results by session and setup to refine rules. Over time, consistency—not prediction—drives outcomes.

Practical Playbook

• Define context on higher timeframes, then execute on intraday charts.
• Wait for confirmation (acceptance, momentum, or confluence) before entry.
• Size positions conservatively and place stops at clear invalidation levels.
• Adapt to session dynamics; conditions shift between Asia, London, and New York.

Common Pitfalls

• Forcing trades without alignment across timeframe, structure, and catalyst.
• Ignoring spreads/slippage during news or thin liquidity.
• Moving stops or adding to losers instead of honoring the plan.

Illustrative Example

Build a simple playbook: identify bias, mark key zones/levels, define triggers and invalidation, and pre‑set targets for 2–3R. Journal results by session and setup to refine rules. Over time, consistency—not prediction—drives outcomes.