RiskPicksWhat is Divergence?
Divergence occurs when a stock's price moves in one direction but a momentum indicator (RSI, MACD, or others) moves in the opposite direction. This disconnect suggests that the current trend is losing steam and may reverse.
Types of divergence
- Bearish divergence: price makes a higher high, but RSI makes a lower high. The stock is rising but momentum is fading. This warns of a potential top
- Bullish divergence: price makes a lower low, but RSI makes a higher low. The stock is falling but selling pressure is weakening. This warns of a potential bottom
How to read it
- Identify two consecutive swing highs (for bearish) or swing lows (for bullish) on the price chart
- Compare the same two points on your indicator (RSI is the most commonly used)
- If they disagree (price higher but indicator lower, or vice versa), you have divergence
Important caveats
- Divergence is a warning, not a signal: it tells you momentum is weakening, not that the price will immediately reverse. Trends can continue for a long time with divergence
- Do not trade divergence alone: use it as confirmation alongside other signals (support/resistance breaks, candlestick patterns, volume)
- Works best at extremes: divergence at RSI levels above 70 or below 30 is more meaningful than divergence in the middle range
- Multiple timeframes: divergence on a higher timeframe (daily) is more significant than on a lower timeframe (5-minute)
Divergence is one of the earliest warnings that a trend may be ending. It does not tell you when, but it tells you to start watching for other signs of a reversal.