Divergence trading is a powerful technique that helps traders identify potential trend reversals and continuation setups. By analysing discrepancies between price movements and key momentum indicators—Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Stochastic Oscillator—traders can gain an edge in predicting market shifts.

In this guide, we’ll explore the two main types of divergences—regular and hidden—with real-world examples, historical price data, and practical strategies for integrating them into your trading approach. We will also cover how to combine divergence signals with support/resistance levels, volume analysis, and Fibonacci retracements to improve accuracy.

Types of Divergence in Trading

Regular Divergence (Reversal Signal)

Regular divergence is a strong indication that a trend is losing momentum and may reverse. It occurs when price makes a new high or low, but the indicator fails to confirm this movement.

Bullish Regular Divergence (Buy Signal)

This happens when price forms a lower low, but the indicator (RSI, MACD, or Stochastic) forms a higher low. Such a pattern suggests that selling pressure is weakening, increasing the probability of a price reversal upwards.

Example: S&P 500 Bullish Divergence (March 2020)

During the COVID-19 crash in March 2020, the S&P 500 made a lower low at 2,191.86 on March 23. Meanwhile, the RSI printed a higher low, indicating decreasing bearish momentum. Shortly after, the index reversed and began a strong bullish rally, recovering to 3,500+ by August 2020.

Bearish Regular Divergence (Sell Signal)

This occurs when price forms a higher high, but the indicator forms a lower high. It suggests buying momentum is weakening, increasing the probability of a downtrend.

Example: Bitcoin Bearish Divergence (April 2021)

Bitcoin hit an all-time high of $64,899 on April 14, 2021. However, the RSI formed a lower high, indicating declining buying pressure. Soon after, Bitcoin dropped sharply, falling to $30,000 by May 2021.

Hidden Divergence (Trend Continuation Signal)

Hidden divergence suggests that a trend is likely to continue. It occurs when price makes a higher low in an uptrend or a lower high in a downtrend, but the indicator moves in the opposite direction.

Bullish Hidden Divergence (Buy Signal)

This occurs when price makes a higher low, but the indicator makes a lower low. Such a signal confirms strong buying pressure and indicates the uptrend is likely to continue.

Example: Apple Inc. Hidden Divergence (October 2021)

Apple’s stock price made a higher low in October 2021, bouncing around $138 before surging. At the same time, MACD formed a lower low, indicating that momentum was briefly lagging before price resumed its uptrend, pushing AAPL to $180+ by December 2021.

Bearish Hidden Divergence (Sell Signal)

Occurs when price makes a lower high, but the indicator makes a higher high. This suggests the downtrend is likely to continue.

Example: EUR/USD Forex Pair (June 2022)

EUR/USD was in a strong downtrend, making a lower high at 1.06 in June 2022. However, the Stochastic Oscillator formed a higher high, indicating weakening bullish momentum. Soon after, the euro dropped further, reaching 0.96 by September 2022.

Using RSI, MACD, and Stochastic for Divergence Trading

RSI Divergence Strategy

Regular Bullish Divergence happens when price forms lower lows while RSI forms higher lows, signalling buying opportunities. Conversely, Regular Bearish Divergence occurs when price forms higher highs while RSI forms lower highs, indicating a potential sell-off.

MACD Divergence Strategy

Regular Divergence takes place when price makes a new high or low, but MACD fails to confirm it. Hidden Divergence tends to offer stronger signals when combined with moving averages or support/resistance zones.

Stochastic Divergence Strategy

Divergence signals on the Stochastic Oscillator appear when price and the indicator show opposite movements. These signals tend to be especially strong when detected at overbought or oversold levels.

Practical Tips for Trading Divergences

It’s important to always confirm divergence signals with additional indicators like trendlines, support/resistance, and moving averages. Using higher timeframes can also provide stronger divergence signals. Risk can be managed effectively by setting stop-losses beyond recent swing highs/lows.

Final Thoughts

Divergence trading is an essential tool in a trader’s arsenal, offering insights into potential trend shifts and continuation setups. Nevertheless, while divergence signals provide valuable trade opportunities, they should never be used in isolation.

Maximising success requires combining divergence with other technical tools such as volume analysis, trendlines, moving averages, and Fibonacci retracements. Market context also plays a crucial role—fundamental factors like economic reports, central bank decisions, and geopolitical events can override divergence-based signals.

Risk management remains key. Even the most reliable divergence setups can fail, so applying proper stop-loss strategies, position sizing, and trade management techniques helps safeguard capital and optimise long-term profitability.

Ultimately, mastering divergence trading requires practice, backtesting, and disciplined execution. Incorporating these techniques into a structured trading plan can significantly enhance traders’ ability to anticipate market movements and make informed decisions.