Have you ever noticed that prices move strongly downward, but technical indicators tell a different story?

This situation is called a divergence pattern, and it is a very important signal in trading.

Divergence occurs when the price and indicator do not move in the same direction.
It indicates that the current trend may not be as strong as it appears, or sometimes it signals that the trend will continue, depending on whether it is a Regular Divergence or Hidden Divergence.

Regular Divergence is a signal where the price moves strongly, but the indicator does not confirm.
For example, the price makes a new low, but RSI does not go lower accordingly.
This is Bullish Divergence, suggesting that the price may reverse upward.
Conversely, if the price rises strongly but the indicator does not confirm, that is Bearish Divergence, predicting a reversal downward.

Hidden Divergence is another type.
It occurs when the price swings weakly, but the indicator still shows strength.
This situation indicates that the existing trend will likely continue, not reverse.

The commonly used indicators to observe these signals are MACD, RSI, and Williams Percent Range.
MACD is used to observe price momentum.
RSI indicates whether the price is overbought or oversold.
Williams Percent Range functions similarly.

Trading Regular Divergence is quite straightforward.
Look for points where the price makes a Higher High or Lower Low while the indicator does not confirm.
When you see such signals, wait for the price to start reversing, such as a candlestick changing color or breaking a moving average.
Set a stop-loss at an appropriate level, and enter a position in the opposite direction of the current trend.

For Hidden Divergence, the approach is different.
When you see this signal, hold the position in the current trend.
The price will likely move in the same direction as before.
When the price breaks out of a range, buy or sell accordingly, and set a stop-loss at the previous candle’s high or low.

One thing to be cautious about is that divergence can occur multiple times before the price moves as expected.
The price might show divergence two or three times before reversing.
Therefore, risk management and proper stop-loss placement are very important.

The advantage of the divergence pattern is that it helps you identify trend reversal points or continuation before the price actually moves.
However, it is not a 100% accurate signal.
If you understand the types of divergence that occur and combine this with good risk management, this tool can help your portfolio generate profits.