Divergence is when the price of an asset is moving in the opposite direction of a technical indicator, like an oscillator, or contrary to other data. Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction. Divergence can be used as a scalping strategy as it provides signals for price reversals. There are two types of divergence we shall focus on: Bullish divergence and Bearish divergence.

Bullish Divergence

A bullish divergence is the pattern that occurs when the price reaches lower lows, while the technical indicator makes higher lows. Although there is a bearish attitude on the market, the discrepancy means that the momentum is slowing. Therefore, it is likely that there will be a rapid increase in price. Therefore, bullish divergence is a long position signal.

The image above shows example of bullish divergence. The price continues making lower lows while the stochastic indicator makes higher lows in the same period. This is a bullish signal as price increases after the divergence. Using the stochastic you can make your entry more precise by waiting for the blue line of the stochastic to cross above the orange line which acts as a confirmation that the price will reverse given the divergence.

Bearish Divergence

A bearish divergence is the pattern that occurs when the price reaches higher highs, while the technical indicator makes lower highs. Although there is a bullish attitude on the market, the discrepancy means that the momentum is slowing. Therefore, it is likely that there will be a rapid decline in price.

The image above shows example of bearish divergence. The price continues making higher highs while the stochastic indicator makes lower highs in the same period. This is a bearish signal as price declines after the divergence. Using the stochastic you can make your entry more precise by waiting for the blue line of the stochastic to cross below the orange line which acts as a confirmation that the price will reverse given the divergence.

Divergence is a very powerful strategy used by professional traders. By incorporating other technical aspects such as support and resistance or candlesticks, you can make your divergence trading much more accurate.