In a nutshell, divergence can be seen by comparing price action and the movement of an indicator. It doesn’t matter what indicator you use. You can use RSI, MACD, Stochastic, CCI, etc. The great thing about divergences is that you can use them as a leading indicator, and after some practice, it’s not too difficult to spot. When traded correctly, you can be profitable with divergences. The best thing about divergences is that you usually buy near the bottom or sell near the top. This makes the risk on your trades tiny relative to your potential reward.
Just think “higher highs” and “lower lows. “ Price and momentum normally move hand in hand, like avocado and toast, Hansel and Gretel, Ryu and Ken, Batman and Robin, Jay Z and Beyonce, Kobe and Shaq, salt and pepper…You get the point. If the price is higher, the oscillator should also be making higher highs. The oscillator should also make lower lows if the price makes lower lows. If they are NOT, that means the price and the oscillator are diverging from each other. That’s why it’s called “divergence.” Divergence trading is an incredible tool in your toolbox because divergences signal to you that something fishy is going on and that you should pay closer attention to.
Using divergence trading can help spot a weakening trend or reversal in momentum. Sometimes, you can even use it to signal a trend to continue!
There are two types of divergence: 1. Regular 2. Hidden