Hidden Divergence: The Secret Reversal SignalGOLD (US$/OZ)TVC:GOLDofficialjackofalltrades When Price and Indicators Disagree, Someone's Lying. Usually It's Price. Divergence is one of the most powerful reversal signals in trading. It happens when price makes a new high (or low), but the indicator doesn't confirm it. This disconnect reveals weakening momentum — and often precedes major reversals. What Is Divergence? Divergence occurs when: Price and indicator move in opposite directions. Example: Price makes higher high RSI makes lower high = Bearish divergence Momentum is weakening Reversal likely Why It Works: Price can be manipulated. Momentum can't. When momentum weakens, price eventually follows. Types of Divergence 1. Regular Bullish Divergence Setup: Price makes lower low Indicator makes higher low Appears at bottoms Signals potential reversal up Psychology: Selling pressure is weakening. Buyers may take control. 2. Regular Bearish Divergence Setup: Price makes higher high Indicator makes lower high Appears at tops Signals potential reversal down Psychology: Buying pressure is weakening. Sellers may take control. 3. Hidden Bullish Divergence Setup: Price makes higher low Indicator makes lower low Appears in uptrends Signals trend continuation Psychology: Pullback is healthy. Uptrend will continue. 4. Hidden Bearish Divergence Setup: Price makes lower high Indicator makes higher high Appears in downtrends Signals trend continuation Psychology: Rally is weak. Downtrend will continue. Best Indicators for Divergence 1. RSI (Relative Strength Index) Why It Works: Measures momentum Clear overbought/oversold levels Easy to spot divergence Most popular for divergence trading Settings: 14-period RSI (default) 2. MACD (Moving Average Convergence Divergence) Why It Works: Shows trend and momentum Histogram makes divergence obvious Multiple components for confirmation Settings: 12, 26, 9 (default) 3. Stochastic Oscillator Why It Works: Sensitive to momentum changes Good for shorter timeframes Clear overbought/oversold Settings: 14, 3, 3 (default) 4. CCI (Commodity Channel Index) Why It Works: Measures deviation from average Works well in ranging markets Less common = less crowded How to Trade Regular Divergence Bearish Divergence Setup: Identify Uptrend — Price making higher highs Spot Divergence — Price makes new high, RSI doesn't Wait for Confirmation — Bearish candle pattern or break of support Enter Short — After confirmation Stop Above High — Above the divergence high Target Support — Next major support level Bullish Divergence Setup: Identify Downtrend — Price making lower lows Spot Divergence — Price makes new low, RSI doesn't Wait for Confirmation — Bullish candle pattern or break of resistance Enter Long — After confirmation Stop Below Low — Below the divergence low Target Resistance — Next major resistance level How to Trade Hidden Divergence Hidden Bullish Divergence (Trend Continuation): Confirm Uptrend — Higher highs, higher lows Spot Pullback — Price makes higher low Check Indicator — Indicator makes lower low Enter Long — On bounce from higher low Stop Below Low — Below the higher low Target New High — Continuation of uptrend Divergence Confirmation Techniques Never trade divergence alone. Confirm with: 1. Candlestick Patterns Engulfing Hammer/Shooting Star Doji at extreme 2. Support/Resistance Divergence at key level = stronger Confluence increases probability 3. Trendline Break Divergence + trendline break = high probability Clear structure break 4. Volume Decreasing volume on new high/low Confirms weakening momentum Multi-Timeframe Divergence The Power of Confluence: Example: Daily chart: Bearish divergence 4H chart: Bearish divergence Both timeframes agree = Very high probability reversal Process: Check higher timeframe for divergence Check lower timeframe for divergence If both show divergence = strong signal Enter on lower timeframe Use higher timeframe for target Common Divergence Mistakes Trading Without Confirmation — Entering on divergence alone. Always wait for confirmation. Ignoring Trend — Trading regular divergence in strong trends. Trend can continue despite divergence. Wrong Timeframe — Trading 5-minute divergences. Use higher timeframes for reliability. Forcing Divergence — Seeing divergence where it doesn't exist. Be objective. No Stop Loss — Divergence can fail. Always use stops. Divergence Strength Factors Strong Divergence Has: Multiple Indicators — RSI and MACD both show divergence Higher Timeframe — Daily divergence > 1H divergence Extreme Levels — RSI >70 or