I'm sure many of you have heard of divergences when doing technical analysis in the crypto market. But honestly – many traders overlook this pattern, even though it can be extremely valuable. Today, I want to especially point out the bearish divergence, which often signals the opposite of what you might expect at first glance.

Divergence is basically a pattern that occurs when the price of a crypto moves in the opposite direction of a technical indicator. That sounds abstract, but it’s actually a pretty reliable warning sign that the current trend is weakening. There are two main types: the classic or regular divergence, which occurs at the end of a longer trend, and the hidden divergence, which is found at the end of a consolidation phase.

Let me start with the bearish divergence because I believe it’s particularly interesting for active traders. A bearish divergence occurs when the price of an asset continues to rise and hits new highs, but the indicator – let’s say the RSI – simultaneously produces lower highs. This is a classic sign that upward momentum is waning. Take Bitcoin as an example: the price makes new all-time highs, but the RSI shows weaker highs. That’s the definition of a bearish divergence, and it indicates that a trend reversal from up to down is imminent.

What fascinates me about this? These patterns constantly appear on crypto charts. If you know what to look for, you can identify real trading opportunities with them. The bearish divergence is basically the market telling you: “Hey, the buyers are getting tired.”

But there’s also the opposite – the bullish divergence. Here, the price keeps falling lower, but the indicator produces higher lows. This signals that the downward momentum is weakening and an upward rally is likely. For example, Bitcoin could rise by about 20 percent in such a situation if the bullish divergence is correctly identified.

Now, onto the hidden divergence – and this is where it gets interesting. A hidden divergence differs from the classic divergence by its position within the trend. It usually occurs within an existing trend and signals the end of a consolidation phase. I call it “hidden” because it’s not obvious to inexperienced eyes.

A bullish hidden divergence, for example, occurs when the price reaches a higher low, but the indicator shows a lower low. This means the bullish trend is likely to continue soon. Conversely, the bearish hidden divergence – and this is important – is the opposite. The price hits a lower high, but the indicator shows a higher high. This signals that a trend reversal could be coming, and the downtrend will continue.

I have a good example: Ethereum consolidated and started moving sideways, creating a higher low. However, the stochastic indicator showed a lower low – a bullish hidden divergence. And indeed, Ethereum recovered in the following weeks by almost 90 percent. That’s exactly the signal you’re looking for.

On the other hand, a hidden divergence can also be a sign of a deeper correction. After a weak rebound from a correction in May 2021, Ethereum showed a hidden bearish divergence pattern. The price displayed a lower high, while the MACD indicator showed a higher high. Shortly afterward, Ethereum fell by about 35 percent. That’s the power of bearish divergence – it shows you when it’s time to be cautious.

The difference between normal and hidden divergence is subtle but important. A regular divergence typically appears at the end of a long trend and signals a new correction phase. A hidden divergence usually appears at the end of a consolidation and indicates that the consolidation will soon end in favor of the original trend.

How do you practically recognize these patterns? The most important thing is to use a technical indicator. Most oscillators work – RSI, MACD, Stochastic. I recommend starting with one you feel comfortable with. Thickening the lines on your chart makes them easier to spot.

Let’s take the MACD indicator. It consists of the MACD line, the signal line, and the histogram. When the trend is upward, look for a hidden bullish divergence – the MACD line makes a lower low while the price makes a higher low. When the trend is downward, look for a bearish divergence – the MACD line makes a higher high while the price makes a lower high.

A concrete example from March 2021: after the low on March 25, Bitcoin started to rise. The consolidation occurred between March 27 and 28. On March 28, the MACD line showed lower lows than on March 27 – yet the Bitcoin price was higher. That was the signal to start a rally. Bitcoin increased by about 9 percent over the next two days.

The stochastic oscillator is another great tool. I usually use input values of 15-5-5 or 14-3-3. Here we see Ethereum in a downtrend on a 1-hour chart in June 2021. From June 15 to 17, a hidden bearish divergence was visible because the stochastic oscillator made a higher high while Ethereum reached a lower high. This pattern indicated that the consolidation was over and Ethereum could fall further. In hindsight, we can see that Ethereum’s price correction accelerated – the cryptocurrency lost about 20 percent over the next two days.

Now, onto practical application. If you’ve identified a hidden divergence, what do you do?

First step: filter your trades. A hidden divergence signals the end of a price consolidation. For Bitcoin, it indicates a continuation of the previous trend. To get the best results, look for the pattern in the context of the larger trend. If the overall trend is upward, look for a bullish hidden divergence and use it as a buy signal. Ignore bearish hidden divergence patterns in an uptrend. In a downtrend, do the opposite: look for hidden bearish divergences and ignore the bullish patterns. You get a more reliable signal when the hidden divergence aligns with the direction of the larger trend.

Second step: place your stop-loss. Divergence patterns are great for signaling an upcoming trend change, but they can be less reliable when it comes to the exact timing. Give your trade room to breathe. You don’t want normal market movements to stop out your position. After discovering the hidden divergence, place the stop-loss just behind the most recent swing price extreme. For a bullish hidden divergence, place the stop-loss just below the swing low. For a bearish divergence, place it just above the swing high.

Third step: set your target. Crypto markets can exhibit breathtaking trends. If you’re trading on shorter timeframes – 1-hour or 2-hour charts – you should set a target where you can take some or all of your profit off the table. A good rule of thumb is to aim for at least twice the distance of your stop-loss. If your stop-loss is 100 ETH, aim for at least 200 ETH. If you’re lucky and the prices move in your favor, watch for classic divergences that signal an early trend reversal.

But here’s an important warning: there are limitations you should be aware of. First, divergence patterns are easy to recognize in hindsight but may be difficult in real-time. That’s because you might be happy about an uptrend, only to later realize it was a bearish divergence situation. Try to keep your emotions out of the market. An emotional perspective can distort your analysis.

Second, the risk-reward ratios are less reliable when hidden divergences appear late in a trend. The trend is mostly over, and while you wait for the price to diverge from the indicator, you might enter at a worse price.

Third, price patterns for smaller cryptocurrencies may not be as reliable as those on larger markets like Bitcoin and Ethereum. Fewer buyers and sellers are interested in a smaller market, making it more susceptible to volatility.

In conclusion: bullish and bearish hidden divergences are powerful patterns that occur at the end of consolidation. They signal a continuation of the original trend. These patterns frequently appear in Bitcoin, Ethereum, and other crypto markets, making them easy to learn. However, recognizing them in real-time can be challenging. The key to success with hidden divergences is to filter your trades in line with the larger trend and always analyze market sentiment. It’s best to use a trend-following momentum indicator to confirm the signals. With some practice, you’ll find these patterns everywhere on the charts.