Bearish Divergence and Bullish Divergence: Understanding the Contradictory Signals in Trading

What is Divergence?

Divergence, or conflicting signals, occurs when the movement of price and technical indicators do not follow the same direction. This phenomenon often appears during trend pauses (Reversal) or when the trend continues (Continuation), depending on the type of Divergence that occurs.

Many traders use Divergence as a warning signal for potential market reversals because it indicates weakness in the current trend or a loss of momentum (momentum) in the price.

Types of Divergence Traders Should Know

Divergence is divided into 2 main types, which have completely different meanings and trading methods.

Type 1: Regular Divergence (Standard Contradiction Signal)

Regular Divergence appears when the price makes new highs or lows continuously, but the technical indicator does not confirm that movement. This signal often indicates the end of a potential trend.

• Bullish Divergence: Appears at the end of a downtrend when the price makes a lower low (Lower Low) but RSI or MACD do not fall as low as the price. This indicates selling pressure is waning and the price is likely to break upward.

• Bearish Divergence: Appears at the end of an uptrend when the price makes a higher high (Higher High) but the indicator does not reach higher levels with the price. This suggests buying pressure (buying pressure) is weakening.

Type 2: Hidden Divergence (Hidden Contradiction Signal)

Hidden Divergence occurs when the price makes minor adjustments, but the indicator shows strength in the original trend direction. This signals that the current trend is not over.

• Hidden Bullish Divergence: Price makes a higher low (Higher Low) but RSI or MACD still show upward momentum.
• Hidden Bearish Divergence: Price makes a lower high (Lower High) but indicators still show downward momentum.

Popular Indicators for Tracking Divergence Signals

Traders often use oscillators to detect conflicting signals, such as:

• RSI (Relative Strength Index): Used to identify overbought (Overbought) when above 70 and oversold (Oversold) when below 30.
• MACD: Indicates momentum changes by tracking positive and negative values.
• Williams %R: Measures overbought or oversold conditions over short price periods.

How to Trade with Regular Divergence

Regular Divergence is suitable for contrarian trading against the current trend. When you see bearish divergence while the price is rising, it may be a strong sell signal.

Trading steps:

1. Identify price patterns such as Double Tops or Double Bottoms forming new highs/lows.
2. Confirm that (RSI, MACD, W%R) do not confirm the movement.
3. Wait for the price to break the opposite side of the original trend. When the candlestick confirms a reversal, open a position.
4. Set Stop Loss at the previous high/low.

How to Trade with Hidden Divergence

Hidden Divergence confirms trend continuation. When you see bearish divergence while the price is still declining but a Higher High appears, there may still be room for the price to fall further.

Trading steps:

1. Identify the main trend.
2. Look for Higher Lows (in a downtrend) or Lower Highs (in an uptrend), indicating minor retracements.
3. Confirm that indicators still show strength in the original trend.
4. When the price breaks the trend boundary, open a position in the same direction.

Application Examples

Scenario 1: Regular Bearish Divergence

BTC price reaches $45,000 (Higher High) but RSI does not make a new high (remaining at 65 compared to 72 at the previous high). This indicates waning buying strength. Traders can short (Short) when the price reverses down, setting a Stop Loss at $45,500 and targeting a profit of $42,000.

Scenario 2: Hidden Bullish Divergence

During an uptrend, ETH makes a Lower Low at $1,800 but MACD still shows positive values and does not fall with the price, indicating the uptrend remains strong. Traders can hold or add to their positions when the price rebounds.

Cautions When Using Divergence

1. Not 100% Accurate Signals: Divergence may appear multiple times before the price moves as expected. Always wait for price confirmation before opening positions.

2. Check Market Context: Consider the main trend and support/resistance levels. Avoid trading against very strong trends.

3. Risk Management: Always use appropriate Stop Losses and avoid overly large positions.

4. Combine with Other Tools: Divergence is more effective when used with price patterns and key levels.

Summary

Divergence is a powerful analytical tool. When traders understand the difference between Regular Divergence (indicating potential change) and Hidden Divergence (indicating continuation), and grasp what bearish or bullish divergence reveals, they gain additional tools for market prediction. Practice with a demo account and test these signals in real situations to improve trading skills and risk management.