Traders need to know: Divergence predicts trends with 80% accuracy, but most people use it incorrectly

Traders often overlook Divergence when identifying reversal points because they mistakenly believe that conflicting signals always indicate a trend reversal. In reality, there are 2 types of Divergence that lead to different outcomes, and recognizing and distinguishing these types is key to profitable trading.

What is Divergence and Why Is It Important?

Divergence or conflicting signals occur when the price and an indicator (such as MACD or RSI) move in discordance. Instead of both pointing in the same direction, this mismatch does not mean the indicator is wrong but signals a potential change in trend that may occur.

The crucial point is: 4 types of conflicting signals each tell a different story

• Price makes a strong decline but the indicator does not show strength → Potential reversal up (Bullish Divergence)
• Price makes a strong rise but the indicator does not show strength → Potential reversal down (Bearish Divergence)
• Price declines but the indicator remains strong → The downtrend continues (Hidden Bearish Divergence)
• Price rises but the indicator remains strong → The uptrend continues (Hidden Bullish Divergence)

The 2 Types of Divergence That Must Be Clearly Differentiated

Type 1: Regular Divergence - Reversal Signal

Regular Divergence occurs when the price creates new highs/lows but the indicator does not confirm the strength, indicating the current trend is weakening and may reverse.

Bullish Divergence occurs at the end of a downtrend:

• Price hits a new low (Lower Low)
• But the indicator (such as RSI) does not go lower but starts to rise
• This signals selling pressure is waning, and the price is ready to rebound

Bearish Divergence occurs at the end of an uptrend:

• Price hits a new high (Higher High)
• But the indicator does not go higher and begins to decline
• This signals buying momentum is weakening, and a reversal down may occur

How to trade Regular Divergence:

1. Wait for the indicator to enter overbought (RSI > 70) or oversold (RSI < 30) zones with divergence
2. Wait for confirmation signals, such as a candlestick pattern or break of a weekly trendline
3. Enter a position in the opposite direction of the current trend, with a stop loss at the recent high/low

Type 2: Hidden Divergence - Continuation Signal

Hidden Divergence is a contradictory signal: price weakens but the indicator remains strong, indicating the current trend is likely to continue.

Hidden Bullish Divergence occurs in an uptrend:

• Price makes a higher low (Higher Low), showing weakening correction
• But the indicator remains bullish (not making a new low)
• Interpretation: The uptrend is still intact, and the price is likely to break higher

Hidden Bearish Divergence occurs in a downtrend:

• Price makes a lower high (Lower High), showing weakening rebound
• But the indicator remains bearish (not making a new high)
• Interpretation: The downtrend is still ongoing, and the price may break lower

How to trade Hidden Divergence:

1. Wait for the price to break out of the current trend channel
2. Enter Long/Short in the direction of the trend
3. Set stop loss at the recent high/low of the correction
4. Expect trend continuation

Which Indicators Are Good for Detecting Divergence?

MACD - Best for beginners

• Uses two moving averages to indicate momentum
• MACD positive and rising = strong uptrend
• MACD negative and falling = strong downtrend

RSI - Focuses on overbought/oversold

• RSI > 70 = overbought (beware of reversal)
• RSI < 30 = oversold (beware of rebound)
• When RSI makes new lows/highs not matching the price → Divergence

Williams %R - Similar to RSI but faster

• %R > 80 = overbought
• %R < 20 = oversold
• Divergence from price is a prominent signal

Real Trading Examples of Divergence

Scenario 1: Regular Bullish Divergence

• BTC price drops to a new low at $29,000
• RSI enters oversold zone (< 30) but makes a higher low
• Indicates bullish divergence — price may rebound
• Trader enters long when a green candle closes above resistance
• Stop loss at $28,500, target at $32,000

Scenario 2: Hidden Bullish Divergence

• ETH is in an uptrend
• Corrects to form a higher low (higher low)
• But MACD remains positive and strong → Hidden Bullish Divergence
• Indicates the uptrend is still ongoing
• Trader holds long position expecting a breakout higher

Cautions When Using Divergence

1. Divergence can fail multiple times before the price follows the signal. Always check other signals.
2. Use multiple indicators together; if MACD, RSI, and %R all show divergence in the same direction, probability increases.
3. Always set stop losses; even if the trend looks promising, the price may not move as expected or may go against.
4. Divergence is not 100% accurate; use it as a supplementary tool along with support/resistance levels, volume, and higher timeframes.
5. Understand the context: Regular Divergence signals reversal, Hidden Divergence signals continuation — do not confuse them.

Summary: How to Use Divergence Effectively

Divergence is a useful tool for predicting price trends but is not a 100% reliable signal. The key points are:

• Regular Divergence = Clear reversal signal, use for counter-trend entries
• Hidden Divergence = Continuation signal, confirm with trend-following strategies

Knowing how to distinguish these two types and combining with risk management can help traders identify good entry points and reduce losses. Remember, signals alone are not enough — always combine with price analysis and money management.