Technical Analysis: Divergences (With a Divergence Cheat Sheet) - #CryptoTrading

Published in Crypto technical analysis · Labeled as Trading Strategy ·

Divergence is a disagreement between price and an oscillating indicator such as MACD or RSI. It is not strong enough an indicator to enter a position, but it gives an idea of the state of the market.

What are divergences in trading?

When traders talk about divergences, or divs, they are pointing out a disagreement between the price action and a technical indicator. The thing to look for in the price development are highs and lows, pick a pair of prominent ones and check if your indicator rendered the opposite thing: price made higher high, look for lower high in the indicator for that timespan.

The indicator of choice is typically some kind of oscillator (RSI, MACD).

These divergences signify prevailing momentum in the market. Depending on the type of the divergence they suggest either continuation or reversal.

  • There are plenty of divergence indicators in the TradingView FREE script library

Divergences in short

We distinguish regular divergence, hidden divergence and exaggerated divergence.

Regular Divergence is a sign of trend reversal. Price keeps the trend but indicator already shows the reversal.

  • Signal to short = regular divergence in tops. Price makes higher high but oscillator makes lower high. Underlying weakness, possible exhaustion at the end of a bull trend.
  • Signal to long = regular divergence in bottoms. Price makes lower low but oscillator makes higher low. Underlying strength, possible bottoming in progress.

Hidden Divergence is a divergence that follows the trend. Hidden divs show the market is inclined to continue the current trend.

  • Signal to short = hidden divergence in tops. Price makes lower highs but oscillator makes higher highs. Tends to be found on lower highs in a downtrend.
  • Signal to long = hidden divergence in bottoms. Price makes higher low but oscillator makes lower low. Tends to be found during continuation pauses in an uptrend.

Exaggerated Divergence is only different in that price makes double top or double bottom rather than new high or new low.

Divergences only show a level where to wait for entry signal

The logic behind divergences is that sometimes the indicators shows hidden tendencies of the market (strength or weakness) that might not be visible from the price action yet.

However, this is not a sharp enough indication to signal the actual entry. It gives the idea about the direction you should be looking for when looking for an entry on that timeframe but you will need to dig deeper and switch to shorter timeframes to find a plausible place for your entry.

Volume vs Price: OBV divergence

We wrote a ScriptSpotlight on OBV vs price divergences here.

Examples of MACD divergence, RSI divergence and %bb divergence

Price vs MACD Divergence, standard settings

This is a regular bullish divergence on an old ETHUSD chart.

Price vs StochRSI Divergence

This is a 1D chart of BTCUSD, Bitfinex. The StochRSI shows hidden bearish divergence, the momentum is set to continue the bearish trend.

Price vs %b Divergence, BBands 21 periods - stdev 3

Divergence with %b is a more precise way to observe whether new extremes of the price action are closer to or farther from the bollinger band’s boundaries. There is a more reliable version of the double bottom formation on the bbands: price makes a new low but that now is not a new low relatively to the bbands. That is to say, the first low is below the lower bband and the second low is a lower low in absolute terms (the price) but also either on or above the lower bband - video on bbands explaining that in this article.

TradingView provides the %b indicator which measures how far is the price from the bollinger band of your selected standard deviation and it plots this distance. The situation where you have new low in price but not a new low relatively to the bands shows as a regular bullish divergence on %b.

Get TradingView FREE

This is a 2H chart of BTCUSD, Bitfinex - the same period as the previous one on 1D. Having bearish divergences on a longer timeframe and a bullish divergence on a shorter one shows a short recovery might be in the cards but the bulls aren’t winning yet.

Divergences Cheat Sheets

Crypto Divergences Explained by Josh Olszewicz

Josh Olszewicz did a Youtube series called Better know an indicator which included a good video on divergences. Other videos from the same series included the intro to Ichimoku cloud for crypto traders.


Resources To Learn More About Price/Oscillator Divergences

  • ”dukascopy.com / Do you know everything about divergences?”

Divs on dukascopy.com

  • ”babypips.com / Trading Divergences”

Trading Divergences

Category: Crypto technical analysis · Label: Trading Strategy · Author: Tradingfanbois (contact author)

 

Last added to Crypto Airdrops, Bounties & Opportunities
Airdropped Token or Opportunity Airdrop Date About the airdrop Link
DOT and GRT trading fee discount (reliable exchange, easy KYC) Until 9 March Polkadot and The Graph trading has been enabled on the Aussie exchange Independent Reserve in fiat pairs with AUD, NZD, SGP and USD. (International deposits available, KYC individual). The trading fee is 0.1% flat for accounts without premium or volume discount for the first two weeks of trading. info
Pulse Network Reward Competition Until Mid March Pulse network is opening a competition where the most active social media shills get rewarded from a prize pool of 10k+ USD. Top 50 shills get at least 430 USD worth. info
BitFuFu Bounty Promo Until end of Feb BitFuFu is a cloud mining pool that gives a bounty to approved users for online promo. Bounty is paid out weekly in stablecoin. request entry
Blockchain Space Telegram Bounty Until June 2021 Blockchain Space runs a Telegram activity bounty. The most active users will be paid 50 USDT every 15 days. info
Armor Network Early Mining Opportunity For a few weeks now Armor Network is a fast, anonymous and untraceable cryptocurrency integrated into Telegram ecosystem. No ICO, no premine. Genesis block 21 Jan, mining rewards are still high. WARNING: Right now uses a Telegram wallet, so you don't own the private key. info
Bitfinex Global Grid Competition Until 21 Feb Bitfinex intermediate verified users can enter any of the 4 trading competitions and fight for prize pool of 50k USDt. More information in the banner at the top of the chart in Bitfinex trading interface. sign up
Zappermint bounty Weekly Zappermint is a token for monetization of game apps. They run a weekly social media bounty that must be reported and claimed via bitcointalk. thread
Opportunity: DeFi Tokens on reputable exchange with lower fees 14 days after listing The Aussie exchange Independent reserve is listing new DeFi tokens these days. For each of the new markets has the fee reduced to 0.1% for the first 2 weeks. Currently those markets are yearn.finance, Aave and Kyber Network Crystal. sign up
Earn YoBit's YoDefi tokens Live YoBit set up their own defi project for liquidity on the exchange. The exchange pays out 777 YoDefi Tokens proportionally for all users every 10 mins. sign up
Staking without KYC on WhiteBit New! WhiteBit opened 17 different staking plans with 9 different currencies to choose from. 40% APR, available to the users without KYC. (Be mindful of risks) sign up