Recently, I’ve been reading some traders’ discussions and found that many people still don’t understand what divergence is. It took me quite some time to truly grasp this concept as well. Simply put, divergence is a phenomenon where the price and indicator are not synchronized — the price is rising, but the KD is falling, or vice versa. At this point, you need to be cautious.

When I first used the KD indicator, I focused on golden crosses and death crosses to make trades, but I got caught in countless whipsaws during choppy markets. Later, I realized that cross signals only tell you that the trend is strengthening or weakening, but divergence is more profound — it reflects a fatigue in momentum. Divergence is a leading indicator that can provide early warning before a trend reverses, which is much more reliable than cross signals.

The most observable divergence is the top divergence. You see the price making a new high, but the corresponding KD value is lower than the previous high — this is a signal that the market’s buying pressure is waning. Although the price is still rising, the thrust is insufficient. The bottom divergence works the same way: the price hits a new low, but the KD is higher than the previous low, indicating that the downward momentum is weakening.

However, I must be honest — divergence is not foolproof. I’ve seen many cases where divergence signals appear, but the market continues in the original direction. Especially in the crypto space, with such high volatility and 24/7 trading, the failure rate of KD divergence signals is much higher than in the stock market. Sometimes, it’s just because the market is in a strong unidirectional trend, and KD gets stuck in overbought or oversold zones, making the divergence look like a warning when it’s actually a false signal.

Later, I found that relying solely on a divergence signal for trading isn’t very effective. But combining it with other conditions makes a big difference. For example, now I always confirm the trend direction on higher timeframes before acting. In a bullish trend, a bottom divergence has a much higher success rate than a top divergence. Also, the location of the divergence is more important than the divergence itself — if a top divergence occurs near a resistance level, or a bottom divergence appears at a support level, the probability of reversal increases significantly.

Another key point is to check whether the KD is in an extreme zone. A high-level divergence (KD > 80) indicates a shift from extreme heat to exhaustion, often leading to a strong downward move. A low-level divergence (KD < 20) suggests a shift from panic to optimism, increasing the chances of an upward reversal. These details can greatly enhance the credibility of divergence signals.

I also use both KD and RSI indicators simultaneously. KD reacts quickly and is suitable for capturing short-term highs and lows, but it’s noisy; RSI’s calculation is more stable, with fewer divergence signals but stronger significance. When both indicators show divergence at the same time, the probability of trend reversal increases significantly. That’s when the signal is worth paying close attention to.

Ultimately, divergence is just a warning signal, alerting you that momentum may be weakening and risk could be coming. But it cannot tell you exactly when a reversal will happen, so never treat it as an independent entry criterion. The most effective approach in practice is to combine divergence with trend direction and key support and resistance levels. This way, you can significantly reduce the risk of being caught by false signals.