Divergence
When price and an indicator such as RSI or MACD move in different directions, for example price makes a higher high while the indicator makes a lower high.
Divergence compares the price chart with a momentum indicator, most often the RSI or MACD. If the two disagree, some traders read it as a sign that momentum behind the move is fading.
Types
- Bearish (regular) divergence: price makes a higher high, the indicator makes a lower high. The rise is continuing but with less momentum.
- Bullish (regular) divergence: price makes a lower low, the indicator makes a higher low.
- Hidden divergence: the reverse pattern (for example price makes a higher low while the indicator makes a lower low), which some traders read as a sign the existing trend may continue.
The term is also used in macro, as in "policy divergence" between two central banks moving rates in different directions, which is a different idea.
Worked example
Illustratively, GBP/USD makes a high at 1.2800 with the 14-period RSI at 72. A week later it pushes to 1.2850, but RSI peaks at only 64. That is bearish divergence. It does not say when, or whether, price will turn. In a strong trend, divergence can appear several times while price keeps rising.
Common misconception
Divergence is not a sell or buy signal in itself. It is a description of slowing momentum, and it often persists for a long time. Traders who use it usually combine it with price structure, such as a break of support, and a defined stop-loss.
Not investment advice. This is general information and education, written without knowledge of your circumstances. It is not a recommendation to buy or sell any instrument. Past performance is not a reliable indicator of future results. Trading leveraged products carries a high risk of losing money. Risk warning