Different Types of Divergences with Trading Examples

Hello dear readers, accurately forecasting the direction of price movements in advance is what everyone who participates in financial market trading hopes for. To achieve this, an understanding of both technical and fundamental analysis is necessary. Technical analysts participate in trading using various strategies, and one of these strategies incorporates the concept of "Divergence." Today, we explore divergence and its different types.

What Is Divergence

Divergence is a condition where price movement and a technical indicator move in opposite directions. Price may form higher highs while the indicator forms lower highs. Price may also create lower lows while the indicator creates higher lows. Divergence is often used to anticipate possible trend changes. It shows that price strength is weakening even if price continues in the same direction.

Basically, when we talk about divergences in the Forex market, we refer to a situation where there is a contrast between price movement and a technical oscillator. In other words, in technical analysis, divergence indicates the disparity between a price chart and a corresponding indicator or oscillator's movement. Such divergences are considered possible signs of a reversal in the current price trend, suggesting a likelihood that the trend might not continue. Divergences usually occur at times when price changes slow down and are seen as signs of a possible reversal. 

This mismatch suggests that price movement is losing strength. Indicators are often used to observe this behavior. Divergence appears before many reversals, but not all reversals include divergence. It is a warning sign rather than a direct buy or sell signal. Conditions and market structure remain important when using divergence.

Divergence trading forex is commonly applied to major currency pairs. High liquidity in these markets allows divergence trading forex to appear more frequently on charts. Price movements in forex can change direction even without strong news events. This makes divergence trading forex useful during both active and quiet sessions.

Many strategies rely on divergence trading forex to assess price behavior near key levels. Shorter timeframes show more divergence signals, but false signals are also more common. Longer timeframes reduce noise and provide stronger divergence trading forex scenarios. Market structure plays a major role when divergence trading forex is used in real conditions. Divergence trading forex becomes more effective when price reacts at support or resistance zones. Proper risk planning remains essential in every divergence trading forex approach. There are three types of divergences based on two main categories.

Main Categories of Divergences

Divergences in two main categories arise from the movement of lines on the price chart compared to the lines on the oscillator. These are the following divergences:

Bullish Divergence or Positive Divergence

When the price chart is decreasing while an oscillator or indicator is rising, this is referred to as positive or bullish divergence. This indicates that the current downward trend might weaken and an upward reversal could be approaching. In this type of divergence, the focus is on the bottoms.

The Types of Divergences

Bearish Divergence or Negative Divergence

When the price chart is rising while an oscillator or indicator is falling, this is known as negative or bearish divergence. It indicates that the current upward trend could weaken, suggesting a possible downward reversal. Peaks are generally considered in this type of divergence.

No matter which type of divergence it is, there are certain aspects we need to be aware of. Therefore, when plotting divergences on the chart, we should pay attention to the characteristics of the indicator we are using. For instance, the Relative Strength Index (RSI) indicator considers candle closes, so when drawing divergence lines on the price chart, we do not take the candle shadows into account.

Different Types of Divergences

As mentioned earlier, divergences signify a disparity between a price chart and an indicator or oscillator in technical analysis. These differences play a role in estimating the chances of a trend either continuing or not. Types of divergence in trading focus on differences between price movement and indicator movement. This concept is used to study how price develops over time. Types of divergence in trading appear in both trending and ranging markets. Trading divergences are visible on all chart timeframes. There are various types of divergences, and they are as follows:

Regular Divergence (Standard Divergence)

Standard (Regular) divergence, also known as "normal" or "classic" divergence, is a term frequently used in technical analysis to describe the inconsistency between price movement and an indicator. This type of divergence occurs when the price moves in a certain direction while the technical indicator being used (e.g., RSI, MACD, or Stochastic Oscillator) moves in the opposite direction. An example of this divergence is when the price rises while the indicator falls, or when the price falls while the indicator rises. Regular divergence denotes the traditional disparity between a price chart and an indicator or oscillator. There are two types of standard divergence:

1. Positive (Bullish) Regular Divergence
2. Negative (Bearish) Regular Divergence

Regular Divergence Types

Regular divergence shows situations where price fails to follow previous highs or lows. It can signal a shift in market behavior before a reversal happens. This type of divergence can be seen across currencies, stocks, and other markets.

Bullish (or Positive) Regular Divergence

Standard bullish divergence occurs when the price makes lower lows while the indicator makes higher lows, which can be a sign that the downtrend may be ending and an uptrend may be starting. If the indicator rises while the price falls, it is interpreted as a possible bullish signal. In other words, while the price makes lower lows, the indicator makes higher lows. This situation indicates that the strength of buyers is increasing and the current downtrend may be about to end. Bullish divergence can be considered a buy signal for traders. Take a look at the example of the Gold/US Dollar chart.

Regular Divergence on the XAU/USD chart

Bearish (or Negative) Regular Divergence

Standard bearish divergence occurs when the price makes higher highs while the indicator makes lower highs, indicating that the uptrend may be ending and a downtrend may be starting. In other words, when analyzing the chart, if the price makes higher highs and the indicator makes lower highs, this situation may signal that the bullish trend is about to end and a new bearish trend is imminent. When the price is increasing while the indicator is decreasing, it implies a possible signal for an upcoming decline. See example on the Spot Gold/US Dollar 4-hour chart above.

Hidden Divergence

Hidden divergence shows the differences between the movements in the price chart and oscillators. It is particularly used to predict trend reversals and continuations. Oscillators, often known as momentum indicators, are used to determine the strength and direction of price movements. Hidden divergence provides signals that a trend is likely to continue. When a hidden divergence occurs between the price chart and the indicator or oscillator, the likelihood of the current trend continuing increases. There are two types of hidden divergence:

1. Bullish (Positive) Hidden Divergence
2. Bearish (Negative) Hidden Divergence

Types of Hidden Divergence

Hidden divergence can indicate moments when the trend is intact but the strength behind each move is shifting. It may appear during periods of low volatility or when the market is adjusting to recent news. This type of divergence can be observed during calm sessions or after sharp market reactions.

Bullish (Positive) Hidden Divergence

Hidden bullish divergence occurs when the price chart makes a higher low while the oscillator makes a lower low. As the price forms higher low points from previous lows, if the indicator or oscillator shows lower low points, this scenario reflects the probable continuation of the existing trend. It is a signal of a period where the price could reach higher levels. Refer to the example on the EUR/USD chart.

Hidden Divergence on the EUR/USD chart

Bearish (Negative) Hidden Divergence

Hidden bearish divergence occurs when the price chart makes a lower high while the oscillator makes a higher high. This indicates that the current downtrend is likely to continue. As the price creates lower high points from previous highs, if the indicator or oscillator displays higher high points, this situation reveals the weakening of the current trend. It's a sign of a period where the price could decline in the short term. An example on the EUR/USD chart above illustrates this.

Hidden bullish divergence indicates that buyers are maintaining their strength and prices may rise again. Hidden bearish divergence, on the other hand, shows that sellers are still strong and prices may start to fall again. Hidden divergences indicate the likelihood of trend continuation and are usually used as a sign that the current trend will continue during a pullback phase.

Exaggerated Divergence

Exaggerated divergence occurs when there is a more pronounced and often horizontally defined discrepancy between the price and the oscillator. This type of divergence is interpreted similarly to standard divergences but provides a clearer signal. Exaggerated divergence indicates specific differences between price movements and oscillators and is used to identify market reversals. This term is less commonly used and is sometimes referred to as "Hyperbolic Divergence". Exaggerated divergence is a type of divergence that becomes more apparent than usual. The discrepancy between the price chart and the oscillator becomes so pronounced that it is considered a stronger signal that the trend may reverse.

Exaggerated Divergence Variations

Exaggerated divergence appears when price extends quickly in one direction but market reactions start to weaken. It can occur after rapid rallies or sharp drops, showing that the trend is stretching beyond normal levels. This divergence often happens during volatile sessions or after sudden news events. It may indicate that price swings are becoming less sustainable, even if the main trend continues. Everyone in trading pays attention to these moments to see when a trend might pause or slow down.

Positive (Bullish) Exaggerated Divergence

While the price forms the equal low points, the indicator (oscillator) shows higher low points, or conversely, the indicator forms the same low points while the price forms lower lows. See the EUR/GBP chart below.

Exaggerated Divergences on the EUR/GBP chart

Negative (Bearish) Exaggerated Divergence

As the price creates the equal high points, the indicator (oscillator) displays lower high points, or conversely, the indicator forms the same high points while the price forms higher highs. See the EUR/GBP chart above.

Both Positive Exaggerated Divergence and Negative Exaggerated Divergence can be considered significant signs of a trend reversal. All types of divergence are used in technical analysis to aid in predicting price direction or changes in trend.

These types of divergences provide valuable information for traders using technical analysis tools and can be a powerful tool for making forecasts about market movements when interpreted correctly. All divergences in technical analysis can also reflect the emotional and psychological states of market participants, so understanding market sensitivity is critical for predicting future price movements.

Types of divergence in trading offer a structured way to analyze price behavior. This method supports decision making when price reaches key chart areas. Types of divergence in trading gain value when market context is considered. Consistent analysis improves long term results. A divergence trading strategy focuses on identifying differences between price movements and indicators. A successful divergence trading strategy often considers trend direction and chart structure. Many traders use a divergence trading strategy to anticipate possible trend shifts. Applying a divergence trading strategy across different timeframes can reveal both short-term and long-term opportunities. Proper risk management matters when using any divergence trading strategy.

It is important to remember. While the Forex market offers substantial opportunities, it also comes with high risks, which means there is a possibility of losing our capital. When making trading decisions, we should carefully research, learn to manage risks, and experience different strategies. We should be aware that divergences are just one component in trading and might not always yield accurate results. When evaluating signals using tools like divergences, we must always be sensible and cautious. By combining risk management with emotional control and staying up-to-date with information, we can seize more successful trading opportunities in financial markets. Trade wisely, get good results!

Frequently Asked Questions about Divergence

There is a section that answers common questions about divergence in trading. The FAQ provides easy-to-understand explanations to help readers grasp the topic better.

What is divergence in trading?

Divergence happens when price and an indicator move differently, showing that trends may change direction.

What is a divergence trading strategy?

A divergence trading strategy uses differences between price and indicators to identify possible entry or exit points.

Which indicators are best for divergence?

RSI, MACD, and Stochastic are commonly used because they clearly show differences in price movement.

Can divergence be used in forex?

Yes, it is effective in forex to spot shifts in trends and timing of trades.

Does divergence always predict reversals?

Not always; divergence indicates possible changes but should be combined with other analysis tools.

What is regular divergence?

Regular divergence occurs when price makes a new high or low but the indicator does not follow the same move.

What is hidden divergence?

Hidden divergence appears when price retraces in the trend direction but the indicator does not match the previous swing, often suggesting trend continuation.

How do bullish and bearish divergences differ?

Bullish divergence forms when prices drop but indicators rise; bearish divergence occurs when prices rise but indicators fall.

Can divergence be used on all timeframes?

Yes, it works on short-term and long-term charts, though higher timeframes provide stronger signals.

Is divergence suitable for beginners?

Yes, beginners can use it but should practice identifying valid signals before trading real money.

How do I confirm divergence?

Confirm with trendlines, support/resistance, or other indicators before making a trade decision.

Can divergence appear in sideways markets?

Yes, but signals may be weaker and require careful analysis to avoid false alerts.

How is exaggerated divergence different?

Exaggerated divergence happens when price stretches beyond previous highs or lows while the indicator lags behind, showing trend overextension.

What is positive divergence?

Positive divergence occurs when price forms lower lows but the indicator forms higher lows, often signaling a possible upward move.

What is negative divergence?

Negative divergence occurs when price forms higher highs but the indicator forms lower highs, often signaling a possible downward move.

Can divergence be used in stocks?

Yes, it is applicable in stocks to evaluate trend strength and expected reversals.

How reliable is divergence?

Divergence is useful but not foolproof; always combine with trend analysis and risk management.

What is a good indicator combination?

RSI with MACD is a popular combination to detect divergence signals effectively.

Can divergence indicate trend continuation?

Yes, hidden divergence often signals trend continuation rather than reversal.

How does volume affect divergence?

Low volume may weaken the reliability of divergence signals, while high volume adds confidence.

Should I use divergence with candlestick patterns?

Yes, candlestick patterns can help confirm divergence signals and improve timing.

How often do divergence signals appear?

Frequency depends on market activity and the chosen timeframe.

Can divergence signals fail?

Yes, like any indicator, divergence can produce false signals without proper confirmation.

Is divergence useful for day trading?

Yes, it can be applied on intraday charts to spot short-term trend changes.

Is divergence used in crypto trading?

Yes, it works in cryptocurrencies to identify emerging reversals or trend strength.

What mistakes should I avoid?

Avoid acting on divergence alone and ignoring overall trend or market context.

How to practice divergence?

Use demo accounts and historical charts to spot divergence and verify outcomes before real trading.

Does divergence work in all markets?

Yes, it is applicable in forex, stocks, crypto, and commodities.

How to spot hidden bullish divergence?

Look for higher lows in price while the indicator forms lower lows during an uptrend.

How to spot hidden bearish divergence?

Look for lower highs in price while the indicator forms higher highs during a downtrend.

What is the difference between regular and hidden divergence?

Regular divergence signals impending reversals, hidden divergence signals trend continuation.

Can divergence work in volatile markets?

Yes, but careful confirmation is needed due to price swings and noise.

How do I combine divergence with trendlines?

Confirm divergence signals when price breaks or reacts near trendlines for higher accuracy.

Can divergence indicate exit points?

Yes, it can signal that a trend is weakening and help decide where to exit trades.

Are some divergences stronger than others?

Yes, signals on higher timeframes and with stronger trend support tend to be more reliable.

Can divergence be automated?

Some trading platforms can detect divergence automatically, but human verification is recommended.

How to reduce false divergence signals?

Combine divergence with trend analysis, support/resistance, and volume confirmation.

Can divergence help with stop-loss placement?

Yes, it can indicate when a trend may weaken, guiding stop-loss adjustments.

How do I learn divergence effectively?

Study charts, practice on historical data, and test strategies in demo accounts.

Is divergence suitable for swing trading?

Yes, it is commonly used in swing trading to identify potential trend reversals and continuations.