Anyone who frequently looks at candlestick charts should have heard of the concept of divergence, but not many traders truly understand what divergence means. I’ll briefly talk about top divergence and bottom divergence—both are quite helpful for judging short-term turning points.

Simply put, divergence is a phenomenon in which the price and the indicators are not moving in sync. Most of the time, we’re talking about RSI or MACD. Top divergence suggests that a possible market top may be near, while bottom divergence hints at a chance for a rebound after hitting the bottom.

Let’s start with top divergence. The basic definition is that the price is rising and makes a new high, but indicators like RSI or MACD don’t create new highs; instead, they start to decline. What does this indicate? It indicates that the strength of the uptrend is weakening, buyers’ enthusiasm is cooling off, and a correction or reversal may be coming. When I see this kind of situation at high levels, I become especially alert to the risk of a pullback.

Bottom divergence is the opposite. The price is falling and makes a new low, but the indicator doesn’t make a new low in sync; instead, it starts rising. This means the downside momentum is weakening, the bears’ power is fading, and the bulls may be taking over. At this time, it’s usually a chance for a rebound.

When it comes to the key points of divergence, I think there are several things worth paying attention to. First, the objects you’re observing are different: top divergence is mainly used to judge the risk at high levels, while bottom divergence is used to look for opportunities at low levels. Second is the choice of indicators. Besides RSI and MACD, there are also indicators like the Stochastic Oscillator. Signals from different indicators may differ slightly, but the underlying logic is the same. And there’s also the strength of the signals. Usually, when divergence happens in overbought or oversold zones, the signal tends to be stronger and more reliable.

That said, we have to be realistic about one issue here. No indicator’s accuracy is 100%, and divergence can also produce false signals. I’ve seen too many people blindly place their faith in a single indicator, only to get slapped by reality. The right approach is to look at multiple indicators together, and analyze them alongside factors like moving averages, trading volume, and support and resistance levels. Most importantly, you need a stop-loss and take-profit plan—and you must strictly follow it.

It’s also important to emphasize this: divergence is only a signal of a potential reversal; it doesn’t mean the trend will definitely change. In choppy, range-bound markets, false signals are especially likely to occur, so making decisions purely based on divergence is very dangerous. My habit is to wait until other indicators also give confirmation signals—such as after a pattern breaks out or after the direction is chosen once the moving averages converge—before trading with more confidence.

Finally, it all comes down to risk management. Even if the divergence signal looks very clear, you still need to set stop-loss orders when trading. The market will always surprise you, and protecting your capital is the key to long-term survival.