Trading glossary
Divergence occurs when price and a technical indicator move in opposite directions, which analysts study as a possible sign a trend is weakening.
Divergence in technical analysis occurs when the direction of price disagrees with the direction of an indicator that is supposed to track it. For instance, price might reach a new high while a momentum indicator makes a lower high. Analysts study this mismatch because it can suggest that the force behind a move is fading, even though price is still advancing on the surface.
Divergence is usually described as bullish or bearish based on what it may imply. Bearish divergence appears when price makes higher highs but an indicator makes lower highs, hinting an uptrend could be losing strength. Bullish divergence appears when price makes lower lows while an indicator makes higher lows, suggesting a downtrend may be weakening. Momentum tools like the RSI and MACD are common inputs.
Divergence is a warning of possible change rather than a timing tool, since a trend can continue for some time after divergence appears. Price and an indicator can also stay out of step without any reversal following. Because of this, traders generally wait for additional confirmation and treat divergence as one clue within a broader analysis, not a standalone signal.
Bullish divergence forms when price makes lower lows but an indicator makes higher lows, hinting a downtrend may weaken. Bearish divergence forms when price makes higher highs but an indicator makes lower highs, hinting an uptrend may weaken.
Divergence signals a possible loss of trend strength, but it is not precise timing. Trends can persist well after divergence appears, so traders usually seek further confirmation before drawing conclusions.