Bullish Divergence 2024: Optimize Your Trading Strategy

Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction. Divergence can be used to either spot the potential for a trend reversal, or if you are looking for hidden divergence, it can be used to spot a trend continuation. The regular divergence pattern is used to forecast an upcoming price reversal. When you spot a regular bearish divergence, you expect the price to cancel its bullish move and switch to a downward movement.

Understanding Bullish Divergence: A Key Indicator in Technical Analysis

In this guide, we’re going to cover everything you need to know about divergence, including what it is, the different types and how to spot & use them effectively. Let’s take a look at the first and most common type of divergence, regular divergence. Once there are 14 periods of data available, the second calculation can be done. Its purpose is to smooth the results so that the RSI only nears 100 or zero in a strongly trending market. The RSI is displayed as an oscillator (a line graph) on a scale of zero to 100. Welles Wilder Jr. and introduced in his seminal 1978 book, New Concepts in Technical Trading Systems.

Therefore, any accounts claiming to represent IG International on Line are unauthorized and should be considered as fake. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money. Divergence in technical analysis may signal a major positive or negative price move.

Imagine the price of a stock is making new lows while the RSI makes higher lows with each swing in the stock price. Investors may conclude that the lower lows in the stock price are losing their downward momentum and a trend reversal may soon follow. Each day our team does live streaming where we focus on real-time group mentoring, coaching, and stock training. We teach day trading stocks, options or futures, as well as swing trading.

1. A hidden bullish divergence is a setup where the oscillator forms progressively lower lows at the same time that the price is forming higher lows.
2. It is most often used as a measure of being “overbought” or “oversold”.
3. Since the indicator displays momentum, it can stay overbought or oversold for a long time when an asset has significant momentum in either direction.
4. Traders can use divergences as a leading indicator, as it precedes the price action.
5. These traders attempt to ride the momentum train – or roller coaster to the desired profit.

Here, you can see Litecoin on the daily chart from back in December of 2019. The price was making lower lows while the OBV made higher lows. This suggested that people 10 cheap cryptocurrencies to check out were loading the stock as it was falling, presaging a reversal. Now let’s look at a more elusive type of bullish divergence, hidden divergence. Momentum is positive if today’s price is higher than the price of X days ago, negative if today’s price is lower and at zero if today’s price is the same.

What Is the Difference Between RSI and Moving Average Convergence Divergence (MACD)?

Once again, in the chart below, we added the Stochastic indicator to see how the discrepancy between the market price and the indicator can create a trend reversal. Below, we are going to see examples of each one of the indicators combined with the bullish divergence pattern. From the above chart, we can see that the techncial indicator – in this case the stochastic oscillator – has not reached a lower low. This means that there is a bullish divergence, as the downward momentum forex trading strategies for beginners is weakening and could soon reverse upward.

The RSI was designed to indicate whether a security is overbought or oversold in relation to recent price levels. It’s calculated using average price gains and losses over a given period of time. The default time period is 14 periods, with values bounded from 0 to 100. A bearish divergence occurs when the RSI creates an overbought reading followed by a lower high that appears with higher highs on the price. These guidelines can help traders determine trend strength and spot potential reversals. For example, if the RSI can’t reach 70 on a number of consecutive price swings during an uptrend, but then drops below 30, the trend has weakened and could be reversing lower.

This would be seen as a sign that market momentum is strengthening, and that the price could soon start to move upward to catch up with the indicator. After a bullish divergence pattern, it is common to see a rapid price increase. One last thing to be aware of is normal price fluctuations can lead to false signals. Since bullish divergence occurs during a downtrend, it’s not uncommon to see the price just continue in the same direction, down. So timing is crucial – entering a trade too early based on this signal alone can lead to losses. Now that you know what to look for, you can apply that to your chart analysis and start hunting for if you invested $1000 in moderna stock in january this is how much you’d have now these types of opportunities.

Example of Positive-Negative RSI Reversals

The period of divergence occurred at the time that price was pulling back in a retracement move. Usually divergence is hidden and not immediately obvious until it has occurred. Such tools include the Fibonacci retracement tools, which are able to detect the exact pullback levels and match them with the higher lows formed by the price bars/candles.

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Our chat rooms will provide you with an opportunity to learn how to trade stocks, options, and futures. You’ll see how other members are doing it, share charts, share ideas and gain knowledge. In its simplest definition, divergence is a disagreement between a technical indicator such as RSI and price.

This may indicate rising bullish momentum, and a break above oversold territory could be used to trigger a new long position. The same idea applies to a security that technical indicators such as the relative strength index highlight as oversold. Traders watching for just such an indication might expect a price correction or trend reversal and buy the security. In the EUR/USD 1H chart below, we can see how the pair creates lower bottoms while the RSI is moving in the other direction with higher bottoms.

Class B bearish divergences are illustrated by prices making a double top, with an oscillator tracing a lower second top. Class B bullish divergences occur when prices trace a double bottom, with an oscillator tracing a higher second bottom. Overbought refers to a security that trades at a price level above its true (or intrinsic) value.

Divergent oscillators are powerful leading indicators that guide the trader on not only the market’s future direction but also its speed. When combined with demonstrable divergences, momentum and RoC can precisely ascertain near the moment a market shifts direction. True reversal signals are rare and can be difficult to separate from false alarms. A false positive, for example, would be a bullish crossover followed by a sudden decline in a stock. A false negative would be a situation where there is a bearish crossover, yet the stock suddenly accelerated upward. As you can see in the following chart, the RSI indicator was oversold, broke up through 30, and formed the rejection low that triggered the signal when it bounced higher.

A hidden bullish divergence occurs when the price is making higher highs while the indicator is making lower lows. It is the opposite of the bullish divergence pattern, however, it has a different meaning. First, in order to identify and confirm the bullish divergence pattern, you need to know how to use technical indicators like RSI, Stochastic, and MACD.