Each type of divergence will contain either a bullish bias or a bearish bias. The RSI can in addition, be used to spot a bearish pattern of divergence. The snapshot below illustrates how to spot a divergence using the RSI. Various platforms provide different variations of the MACD indicator.
It can be used to generate trade signals based on overbought and oversold levels as well as divergences. As is true with all forms of technical analysis, investors should use a combination of indicators and analysis techniques to confirm a trend reversal before acting on divergence alone. Divergence will not be present for all price reversals, therefore, some other form of risk control or analysis needs to be used in conjunction with divergence.
- Divergence is one of the most effective and common market conditions that provide reliable trading signals on the price reversal and market retracement depending on the divergence type.
- Even though it is one of the most complicated patterns in technical analysis, it is also an extremely useful pattern that offers traders lots of trading opportunities.
- In this article I will review the basic rules of trading a divergence and provide a tip for finding divergences in the live market with technical indicators other than RSI.
Oscillators are useful for sussing out short-term changes in the market, versus trend-following indicators, which are more useful for longer-term trends. The XRP token is seemingly confirming a bullish divergence on its hourly chart, according to the 100eyes Crypto Scanner account. BeInCrypto strives to provide accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. You comply and understand that you should use any of this information at your own risk. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.
Bullish Divergence Pattern Stochastic Oscillator
In either case, the signal has given you actionable information for your own portfolio management. Swing high is a technical analysis term that refers to price or indicator peak. Swing highs are analyzed to show trend direction and strength. Divergence is when the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator, or is moving contrary to other data.
Moreover, we’ll give you some useful information on how traders actually use divergences. Aside from the regular divergence, the second popular type of divergence is the hidden one. Hidden divergence spots trend continuation, unlike regular divergence, which spots trend reversal.
How Do You Detect Divergence?
Bullish divergences can be a strong indicator of an upcoming reversal in the trend. By keeping the tips above in mind, you can increase your odds of accurately identifying a divergence and executing a trade at an opportune time. Hidden bullish divergences are usually found at the end of a consolidation phase and indicate that the main uptrend is about to resume. As the word suggests, divergences occur when the behavior of a price is opposite to what we expect from the observation of a technical indicator. In both cases, as the price climbed toward its peak, the RSI posted a downward pattern, indicating a market reversal – or bearish divergence.
Price divergence – bearish and bullish – in the crypto space can sometimes determine future price direction. As you can see, Stochastic also experiences hidden divergence with the price at that moment, forming lower lows and indicating a potential continuation of the upward movement. Determine significant support and resistance levels with the help of pivot points. The disagreement or divergence between bearish price action and the trend of the oscillator is one way to answer that question. When this happens it indicates that investor sentiment is too extreme and a reversal to the upside is likely.
First, it is an opportunity for long traders to be proactive about their risk control. That may mean using tighter stops, protective options or just reviewing your portfolio to make sure you are properly diversified. For more speculative traders looking to get long the QQQQ or buy calls, this “bullish divergence” is an alert that a change in the trend may be emerging. In the video I will cover another great example of a bullish divergence like the one on the QQQQ but on an individual stock.
Basically, it is a ‘disagreement’ between the market price of a certain asset and an oscillator or momentum indicator such as the RSI or the MACD. Strong bullish divergence, or regular/classic bullish divergence, appears when the price reaches a lower low but the oscillator reaches a higher low. This means that sellers are not selling at the same momentum, while the price is moving down. Such a situation may predict a potential bottom of the established downtrend. The Money Flow Index is a trading tool that incorporates volume and price data.
A Practical Guide to Screening for and Trading Bullish Divergences
Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction. A triple divergence only occurs where a divergence has given an incorrect signal. Instead of reversing direction, price has made web development consultant a new, higher High (in an up-trend) or lower Low (in a down-trend). If the indicator repeats its signal by making another lower High (in an up-trend) or higher Low (in a down-trend), this is an even stronger signal than the original divergence.
These are essentially momentum indicators that help traders determine the strength or weakness of the specified asset. BiasPriceOscillatorDescriptionExampleBullishHigher LowLower LowIndicates underlying strength. “Buy the dips.”BearishLower HighHigher HighIndicates underlying weakness. “Sell the rallies.”While divergences can occur between price and any other piece of data, they are most commonly used withtechnical indicators, especially with momentum oscillators. Traders use divergence to assess the underlying momentum in the price of an asset, and for assessing the likelihood of a price reversal.
But to be even more specific, let’s analyze some other categories of divergences. Additionally, it is essential to apply the concept of divergence with other factors, such as support and resistance levels or moving averages. Technical analysis in bitcoin and crypto is often a game of confluence. Using several methods together, however, can often be more effective. As we mentioned earlier, there are some reliable indicators that you can use to identify a bullish divergence pattern. These include the following – Relative Strength Index, MACD crossover, and the Stochastic oscillator momentum indicator.
XRP Generates Bullish Divergence as Momentum Stalls
For example, investors can plotoscillators, like the Relative Strength Index , on a price chart. If the stock is rising and making new highs, ideally the RSI is reaching new highs as well. If the stock is making new derivative oscillator thinkorswim highs, but the RSI starts making lower highs, this warns the price uptrend may be weakening. The trader can then determine if they want to exit the position or set a stop loss in case the price starts to decline.
Divergence is caused by the difference in price and indicator directions. It can happen when the indicator predicts the market direction that isn’t yet visible on the price chart. One of the reasons for divergence is a change in the market sentiment.
In other words, it can be easy to miss the bigger picture while being too focused on the present. The Bitcoin daily chart pictured above shows a fxgrow review between price action and the Relative Strength Index (RSI – Purple line). Price showed a clear downward trend, while the RSI showed an upward trend. This means that although the price may be falling, market sentiment is gaining strength.
Bullish Divergence Trading Indicators
We have further defined this signal as a period of diverging trends between prices and the indicator when the indicator has been making peaks in the “overbought” territory. When an indicator “fights” with the actual price action traders can profit. We can see that the bearish divergence MACD setup requires the identification of two progressively lower peaks on the MACD indicator line. The occurrence of the divergence setup should alert the trader towards seizing the initiative for necessary trade action.
While the breakout also caused a sharp RSI increase, the indicator has now fallen below 50, a level which is considered a threshold for a bullish/bearish trend. The daily chart shows that WAVES broke out from a descending resistance line on May 30, leading to the current upward movement. If price reverses direction when it reaches a moving average we say that price has respected that moving average . We would highlight such indicators as the MACD, RSI and Stochastic Oscillator. Still, you can apply other indicators but be sure you do that in a demo account, not a real one. Define whether the price and indicator are moving in different directions.
Investors like divergence because it can be used both as a signal confirmation and a stand-alone signal. However, like any other technical concept, it has features that should be noticed before using it. In our tutorial, we’ll uncover all the secrets of using divergence effectively and applying profitable strategies. Especially when you’re analyzing a market in real-time, it can be hard to fully understand if it’s the end of a consolidation phase or just a very-short term change in the market. Hidden divergences work as continuation signals since the main trend is resumed after the consolidation phase.
This doesn’t mean an immediate sale, but you should be ready to flee. If you lack experience, consider opening a Libertex demo account. You can try live trading without any risk and gain enough experience in a safe environment. Try our divergence strategies on any trading instrument, including CFDs. As soon as you gain the necessary skills, it’ll be time to open a real account.