Today, I want to share some thoughts about Divergence, one of the most reliable signals in technical analysis when applied to identifying potential trend reversals. In other words, divergence is a powerful tool for spotting market tops and bottoms.
Before going further, I should clarify that my personal view on divergence may align with certain established theories, but also includes different interpretations—some of which may even contradict what you have previously learned. I encourage you to read, reflect, and discuss these perspectives so we can all deepen our understanding of this topic.
What Is Divergence?
In my personal definition:
Think of divergence as a wave beneath the surface moving opposite to the price wave on the surface.
In an uptrend, price continues forming higher highs
But if divergence appears, the underlying momentum is actually weakening and pushing in the opposite direction
This indicates that:
The market may soon reverse downward
Or at the very least, the strength of the uptrend is losing steam
The opposite applies during a downtrend.
Common Divergence Patterns Signaling a Potential Top
Here are three common and easy-to-recognize divergence conditions that often warn of a reversal from an uptrend to a downtrend:
Price forms higher highs while the technical indicator forms lower highs
Price forms higher highs while the indicator forms equal highs
Price forms equal highs while the indicator forms lower highs
Divergence Patterns Signaling a Potential Bottom
Similarly, divergence often indicates a reversal from downtrend to uptrend when:
Price forms lower lows while the indicator forms higher lows
Price forms lower lows while the indicator forms equal lows
Price forms equal lows while the indicator forms higher lows
If we analyze the true nature of divergence, there are actually many additional variations—for example, even when price and indicator both slope upward, if the price slope is much stronger than the indicator slope, that already reflects weakening momentum.
However, for clarity and ease of application, focusing on the three core patterns above is sufficient. Among them, pattern #1 typically has the highest reliability, because the internal momentum reversal is strongest.
Applicable Across All Markets
Divergence in technical analysis can be used on any chart and any market, including:
Stocks
Forex
Gold
Bitcoin and other cryptocurrencies
Commodities like oil, coffee, wheat, etc.
This universal applicability is one of the strongest reasons many traders become deeply committed to technical analysis.
Example Using MACD (12, 26, 9)
Below are examples from real Forex charts using MACD:
Top Reversal – Case 1:
Price forms higher highs, MACD forms lower highs
In this example, once MACD confirmed the lower high (divergence), price reversed downward. The size of the move afterward depends on many factors, including multi–timeframe analysis—a topic we will explore in later articles.
Top Reversal – Case 2:
Price forms higher highs, MACD forms equal highs
Top Reversal – Case 3:
Price forms equal highs, MACD forms lower highs
Bottom Reversal – Case 1:
Price forms lower lows, MACD forms higher lows
Bottom Reversal – Case 2:
Price forms lower lows, MACD forms equal lows
Bottom Reversal – Case 3:
Price forms equal lows, MACD forms higher lows
From these examples, you’ll notice that at many market tops and bottoms, divergence is regularly present. The key challenge is filtering out weak or unreliable divergence signals—those that result in shallow reversals or minimal movement.
Solving this filtering problem is essentially the key to successfully identifying tops and bottoms.
Divergence Is Not a Continuation Signal
You may encounter concepts elsewhere like:
Hidden Divergence
Triple Divergence
Quadruple Divergence
While interesting, they are far less important than understanding the core concept of divergence itself.
And in my personal experience:
Divergence is never a signal of trend continuation.
Despite what some articles suggest, divergence only indicates the possibility of reversal. Whether a trader interprets and applies it effectively depends entirely on knowledge and ongoing practice.
Tips for Applying Divergence Effectively
While this article focuses mainly on helping you understand divergence correctly, here are practical suggestions for improving your results:
You can use divergence with any popular indicator such as RSI, MACD, Stochastic Oscillator, or CCI, depending on preference and familiarity.
- Always analyze multiple timeframes.A good rule of thumb is to check a timeframe 4–6 times higher than your main chart.Example:
Analyzing M15 → also check H1
Analyzing H1 → also check H4
Combine divergence with overall trend direction, especially on the higher timeframe.
Pay attention to volume, even though divergence already reflects internal momentum. Examining candle volume around the divergence point makes the signal more precise.
Divergence is far more reliable when it occurs at major support or resistance zones.
Remember that a reversal zone is a price area, not a single candlestick. Execution accuracy improves with trading experience.
Divergence can also be used to manage or exit an existing profitable trade, helping avoid taking profit too early or too late.
- Divergence can fail—as with every tool in trading.The goal is to identify the high–probability setups and repeat them consistently.
Final Thoughts
This article has become quite long, but I hope it provides deeper perspective on divergence and helps clarify how it truly works beneath the surface of price action.
For reliable continuation trading techniques, you may explore:
Thank you for reading. I look forward to your comments and discussions in future articles.
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