Divergence Cheat Sheet
2 min read
The prominent concept in technical analysis is divergence. It outlines when the price moves in the opposite direction of a technical indicator. Divergence is categorized into regular divergence and hidden divergence. Each of them contains either a bullish or a bearish bias.
Let us now focus on divergence trading cheat sheet that will help us to mark regular and hidden divergence fast.
I. Regular Divergence:
A trend reversal is signaled by the regular divergences.
When the bias is bullish, the price is lower low and oscillator is higher high, then
- It demonstrates underlying strength
- Bears are weak
- It warns about the trend direction change- from downtrend to uptrend
When the bias is bearish, the price is higher high and the oscillator is lower low, then-
- It demonstrates underlying weakness
- Bulls are weak
- It warns about the trend direction change- from uptrend to downtrend
II. Hidden Divergences:
A trend continuation is signaled by hidden divergences.
When the bias is bullish, the price is higher high and oscillator is lower low, then:
- It demonstrates underlying strength
- It has good entry or re-entry
- It takes place when retracements are in uptrend
When the bias is bearish, the price is lower low and oscillator is higher high, then:
- It demonstrates underlying weakness
- It takes place when retracements are in downtrend
When technical indicators are paired with momentum oscillators like Commodity Channel Index (CCI), Relative Strength Index (RSI), Stochastic, and Williams %R, divergences take place between price and any other data.
