Divergence for Beginners: Your smart guide to discovering hidden market opportunities.
What is Divergence in technical analysis?
Divergence means 'the difference' between price movement and the movement of the technical indicator (such as RSI or MACD).
In other words, when the price moves in a certain direction while the technical indicator moves in the opposite direction, it is an early signal of a possible change in trend.
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Types of Divergence:
1. Positive Divergence:
It occurs when the price is in a downward trend, but the technical indicator (such as RSI) starts to rise.
This indicates that selling momentum has started to weaken, and there may be an opportunity for the price to rebound upwards.
Example:
• The price records a new low.
• The indicator does not record a new low but begins to rise slightly.
• This is a sign that the decline may weaken, followed by a potential rise.
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2. Negative Divergence:
It occurs when the price is moving upwards while the technical indicator starts to decline.
This indicates that buying momentum is losing strength, and the price may reverse downwards.
Example:
• The price records a new peak.
• The indicator (such as MACD or RSI) does not record a new peak.
• This is a sign of weakening upward momentum and the possibility of a downward correction or reversal.
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Common technical indicators used with divergence:
• RSI.
• MACD.
• Stochastic.
• And sometimes Volume.
Important Note:
Divergence is not a confirmed entry signal, but rather a tool used for early warning of a potential trend reversal.
It is always best to combine it with other analytical tools such as:
• Breaking support or resistance$ETH .
• Clear technical patterns.
• Observe the trading volume.
