Divergence Cheat Sheet

Have you had your fill on 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:

1. Regular divergence
2. Hidden divergence

Each type of divergence will contain either a bullish bias or a bearish bias.

Since you’ve all be 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.

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.

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.”

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 a momentum oscillator include the Commodity Channel Index (CCI), Relative Strength Index (RSI), Stochastic, and Williams %R.

Whew!

That’s quite a lot to remember, isn’t it?

You can write this all down in your palm and look back on it while trading.

But if you’re like Eminem whose palms get sweaty, knees weak, and arms get heavy, when you’re nervous, we wouldn’t recommend this.

You can simply bookmark this page and just revisit it when you mix up those higher lows, lower highs, lower lows, and higher highs.

You don’t want to make a wild guess while coming up with a trade, do you?