Divergence is a technical analysis signal where the price of a currency pair moves in the opposite direction from an oscillating indicator, such as RSI (Relative Strength Index) or MACD (Moving Average Convergence Divergence). Traders use it to identify potential trend reversals or trend continuations.
There are two main types. Regular divergence occurs when price makes higher highs or lower lows while the indicator moves in the opposite direction—signaling a potential reversal of the current trend. Hidden divergence happens when price makes lower lows or higher highs while the indicator shows the opposite pattern—suggesting the current trend may continue.
Divergence has limitations traders should recognize. Indicators are lagging, meaning signals come late during rapid market moves. Divergence can produce false signals, leading to losses if used alone. Successful traders combine divergence analysis with other technical and fundamental analysis techniques to confirm trade setups before committing capital.
