Divergence
Divergence is when the highs and lows of price and of an oscillator (such as RSI, MACD or OBV) point in different directions. For example, price makes a higher high while RSI makes a lower high. It can suggest that a move is losing momentum, but it says nothing about when, or even whether, price will turn.
What is divergence?
Oscillators are calculated from price, so they usually move in the same direction as price. When price makes a new high, RSI or MACD usually makes a new high too. Divergence is when that match breaks down: price makes a new extreme in one direction and the indicator does not confirm it.
This usually means that price is still moving but with less momentum than before. Because RSI and MACD measure momentum and OBV measures the direction of volume, a divergence says something slightly different depending on the indicator it appears on.
Regular divergence
Regular divergence is the type that suggests the current move is losing momentum.
Bearish divergence
Price makes a higher high, the indicator makes a lower high. It can be read as the rise losing momentum.
Bullish divergence
Price makes a lower low, the indicator makes a higher low. It can be read as the decline losing momentum.
How to read it on a chart
- Pick clear highs or lows. Take two clearly formed highs (or two lows) in price. Small wiggles are not suitable for looking for divergence.
- Look at the same candles on the indicator. The indicator's high should be on the same or nearly the same candles as the price high. Matching highs from elsewhere is misleading.
- Compare the directions. Join the two price highs and the two indicator highs with a line each. If the lines point in different directions, there is a divergence.
- Use closed candles. A divergence on a candle that has not closed yet can change until it closes. Looking at closed candles on the same timeframe keeps the reading fixed.
Why it is not a timing signal
In a strong trend, momentum can fade while price keeps moving. In that case divergence forms several times in a row: at each new high the indicator stays a little lower while price keeps rising. A divergence can last for weeks, sometimes months.
That is why divergence does not answer the question "when". It shows that momentum is fading; whether the trend has broken is shown by the structure of highs and lows itself. In an uptrend, a close below the last important low is a far more direct measure than a divergence.
What it shows, what it does not prove
What it shows
- That price's new extreme is not confirmed by the indicator
- That the move is coming with less momentum (or, on OBV, less volume) than the previous one
- A reason to watch the structure of highs and lows more closely
What it does not prove
- That price will turn; divergence can form again and again through a trend and come to nothing
- When a turn will come, if it comes at all, or how far it will go
- A trend change; that is shown by the sequence of highs and lows and the loss of important zones
The MarketLevelMap view
How it relates to zones
The same divergence carries different weight depending on where it forms. If price reaches a resistance zone and makes a higher high there while the indicator makes a lower high, two separate pieces of information point to the same place: the zone is an area where price has reacted before, and the move has arrived there losing momentum.
A divergence in open space, where there is no clear zone nearby, offers weaker context. There is no reference for the level at which price might react. In both cases it is price, not the indicator, that decides the outcome: the close relative to the far edge of the zone, read as a band, shows whether the zone holds.
Often confused with
- When does a trend count as changed?A trend change shows in a change in the sequence of highs and lows; divergence can only show that momentum is fading, and it can form without any trend change.
- RSI (Relative Strength Index)RSI is the indicator on which divergence is looked for most often; how RSI is calculated and what the 30/70 levels mean is covered on that page.
For general information only. Not investment advice.Last updated: