Friends who often look at candlestick charts should have heard of the concept of divergence, especially top divergence and bottom divergence. I was initially confused about it, but later I understood that it is actually an important signal for judging market turning points.

Simply put, divergence is the phenomenon where price and indicators are not synchronized. Most of the time, we look at RSI or MACD indicators, which can help us anticipate possible trend reversals in advance.

Let's start with top divergence, which is the most commonly used warning signal in my trading. When the price keeps making new highs during an uptrend, but RSI, MACD, and other indicators start to weaken or even decline, this is a typical top divergence. What does it tell you? It indicates that the upward momentum is weakening, and the market may have reached its peak, likely followed by a pullback. I often use top divergence to decide whether to reduce positions or be more cautious.

Conversely, bottom divergence occurs when the price is still falling and making new lows, but the indicators start to rebound upward. This is bottom divergence. What does it represent? It suggests that selling pressure is weakening, and the bears are losing strength, while the bulls may start to counterattack. This is often a good opportunity to build positions at low levels.

However, there is a key point to note— the strength of divergence signals varies. If top or bottom divergence occurs in overbought or oversold regions, the signals are usually stronger and more reliable. Additionally, different indicators may produce slightly different divergence signals, but the logic remains the same.

In practical trading, I’ve found a few common pitfalls. First, don’t rely solely on a single indicator. I’ve seen too many people rush to short just because they see top divergence, only to get caught. The correct approach is to confirm with multiple factors such as moving averages, volume, support and resistance levels. Second, divergence in choppy markets can produce false signals, so be extra cautious in such conditions. Lastly, even if the divergence signal is very clear, always set stop-loss orders when trading, because markets can surprise you.

To put it simply, top divergence and bottom divergence are just auxiliary tools, not the holy grail. To use them effectively, you need to combine other technical analysis methods, develop a comprehensive trading plan, and strictly follow it. Only then can you truly grasp market turning points.