Divergence
Price makes a new high but the indicator doesn't. Divergence is often an early warning that a trend is tiring, but it needs price to confirm.
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Text version · Oscillators & Momentum, lesson 6: “Divergence”
Price makes a new high but the indicator doesn't. Divergence is often an early warning that a trend is tiring, but it needs price to confirm.
Price and indicator disagree
Bearish divergence: price makes a new high, but the high in RSI or MACD is lower; a bullish divergence is the opposite. It hints that the force behind the move is fading.
A warning, not a trigger
Divergences can last a long time. The safer approach is to wait for price to confirm on its own (for example, by breaking the uptrend trendline) before acting.
Divergences fail too
In a strong trend, divergence can appear again and again while price keeps making new highs. Use it together with the market regime and a stop-loss: if price doesn't confirm and keeps getting stronger instead, admit you were wrong promptly.
Key takeaways
- Bearish divergence: price makes a new high, but the RSI / MACD peak is lower. Watch for the rally running out of steam.
- Bullish divergence: price makes a new low, but the indicator's low is higher. Watch for the decline running out of steam.
- Divergence can repeat and last a long time, and price can keep going in the same direction.
- Divergence isn't a precise entry signal. Usually you wait for price structure to confirm (e.g. a break of the trendline or of the previous high) before acting.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Choose "Two highs" and click the peaks near bars 58 and 100 in turn: what's the verdict? Switch to MACD and look again.
- Press ▶ to keep playing: on which bar does price break the trendline and confirm?
- Play to the end, choose "Two lows" and connect the troughs near bars 139 and 166: when price made a new low, was RSI's low higher or lower?
- Switch to "Divergence → keeps rising" and turn on "Auto-detect": what does price do after the divergence? What does that tell you?
Quiz and explanations
- 1. Price makes a new low, but RSI's low is higher than last time. This is…
- Answer: Bullish divergence.Price and the indicator "disagree" at the lows.
- 2. What's the safest response to bearish divergence?
- Answer: Stay alert and wait for price to confirm.Divergence can last a long time.
- 3. After bearish divergence appears, price makes two more new highs and the divergence gets more obvious each time. What does this mean?
- Answer: Divergence is only a warning; until price confirms, the trend may continue.Divergence hints that momentum is fading, but as long as price hasn't broken key structure, the trend can keep going.
Terms in this lesson
- divergence (Divergence): Price makes a new high or low but the indicator doesn't, hinting the trend may be weakening.
- MACD: An indicator that measures trend and momentum using the gap between EMA12 and EMA26 (the MACD line) and its signal line.
- market regime (Market Regime): The broad market environment, such as trending, ranging, high or low volatility; the same indicator can work in completely opposite ways in different regimes.
- RSI (Relative Strength Index): A 0–100 indicator comparing average gains with average losses over a period; above 70 is overbought, below 30 oversold.
- stop-loss (Stop Loss): Automatically closes a position when price moves against you to a preset level, capping your maximum loss.
- trendline (Trendline): A straight line through a series of highs or lows that shows a trend's direction and slope.