Have you had your fill of learning how to trade divergences?
Let’s review!
Divergence is a popular concept in technical analysis that describes when the price is moving in the opposite direction of a technical indicator.
There are two types of divergences:
- Regular divergence
- Hidden divergence
Each type of divergence will contain either a bullish bias or a bearish bias.
Since you’ve all been studying hard and not been cutting class, we’ve decided to help y’all out (cause we’re nice like that) by giving you a Divergence Trading Cheat Sheet to help you spot regular and hidden divergences quickly.
Bookmark this page. Tattoo it on your arm. Whatever works. Just don’t lose it.
Regular Divergence
Regular divergences signal a possible trend reversal.
| Bias | Price | Oscillator | Description | Example |
|---|---|---|---|---|
| Bullish | Lower Low | Higher Low | Indicates underlying strength. Bears are exhausted. Warning of a possible trend direction change from a downtrend to an uptrend. |  |
| Bearish | Higher High | Lower High | Indicates underlying weakness. The bulls are exhausted. Warning of a possible trend direction change from an uptrend to a downtrend. |  |
How to remember it: With regular divergence, the oscillator is the whistleblower. It’s telling you the trend is running out of fuel, even though the price is still pushing to new extremes. The oscillator “disagrees” with price, and that disagreement hints at a reversal.
Hidden Divergence
Hidden divergences signal a possible trend continuation.
| Bias | Price | Oscillator | Description | Example |
|---|---|---|---|---|
| Bullish | Higher Low | Lower Low | Indicates underlying strength. Good entry or re-entry. This occurs during retracements in an uptrend. Nice to see during the price retest of previous lows. “Buy the dips.” |  |
| Bearish | Lower High | Higher High | Indicates underlying weakness. Found during retracements in a downtrend. Nice to see during price retests of previous highs. “Sell the rallies.” |  |
How to remember it: With hidden divergence, the oscillator is the one bluffing. It overreacts during a pullback, but the trend structure (higher lows in an uptrend, lower highs in a downtrend) stays intact. The trend calls the oscillator’s bluff and continues.
Quick Comparison
Here’s the simplest way to keep them straight:
| Regular | Hidden | |
|---|---|---|
| What it signals | Trend reversal | Trend continuation |
| Where it appears | At the end of a trend | During a pullback within a trend |
| Who’s telling the truth? | The oscillator (trend is weakening) | Price (trend is holding) |
| Memory trick | R = Reversal | H = Hold the trend |
Which Indicators Can You Use?
While divergences can occur between price and any other piece of data, they are most commonly used with technical indicators, especially with momentum oscillators.
Examples of momentum oscillators include the Commodity Channel Index (CCI), Relative Strength Index (RSI), Stochastic, and Williams %R.
There’s no single “correct” oscillator for divergence trading. They all measure momentum in slightly different ways, so pick the one you’re most comfortable reading and stick with it.
Consistency matters more than which one you choose.
Don’t Forget the Rules
This cheat sheet tells you what to look for, but remember the 9 Rules from the previous lesson tell you how to look for it properly.
A few of the big ones worth repeating:
- Start with price action first, then check the indicator (Rule 1)
- Only connect successive tops to tops and bottoms to bottoms (Rules 2 and 3)
- Make sure the slopes differ between price and the indicator (Rule 7)
- If the move has already happened, don’t chase it (Rule 8)
- Stick to 1-hour charts or longer for more reliable signals (Rule 9)
Wrapping Up
Whew!
That’s quite a lot to remember, isn’t it?
You can bookmark this page and revisit it whenever you mix up those higher lows, lower highs, lower lows, and higher highs. It happens to everyone, especially when you’re staring at a live chart, and the pressure is on.
You don’t want to make a wild guess while coming up with a trade, do you?
What’s Next?
In the next lesson, we’ll cover why divergences should NOT be used as a standalone trade signal.
It’s the most important reality check in this entire series, so don’t skip it!