Divergences between price and indicators: the complete guide

What a divergence is

Momentum indicators such as the RSI, MACD or Stochastic normally follow the price. When the price makes a new high or low but the indicator does not confirm it, the two diverge. The move is still happening, but with less force behind it.

Regular divergences

• Bearish regular: the price makes a higher high, the indicator makes a lower high. The advance is losing momentum.
• Bullish regular: the price makes a lower low, the indicator makes a higher low. The decline is losing momentum.

They are usually watched near the end of a trend, as a warning that it is tiring.

Hidden divergences

• Bullish hidden: the price makes a higher low while the indicator makes a lower low. It is read as a pullback inside an uptrend.
• Bearish hidden: the price makes a lower high while the indicator makes a higher high, a pullback within a downtrend.

Hidden divergences are associated with trend continuation rather than reversal.

How to check one properly

Compare two clear swing points of the price with the indicator readings at the same bars. Use the same timeframe, and prefer swings that are visible without squinting. Confirmation is usually looked for in the price itself, such as a break of the last swing or a key level, rather than in the divergence alone.

Divergences can last for a long time. In strong trends an indicator can diverge several times while the price continues, so a divergence on its own is not a reason to expect a turn.

Divergences in InvestAI

InvestAI’s RSI and other momentum readings are calculated so that you can compare them with the price swings. The synthesis states when signals conflict, including when momentum and price do not agree, and what would change the picture.