START HERE: Divergence Cheat Sheet: Your Quick Reference for Spotting Divergences

Divergence trading is a powerful tool in technical analysis, but keeping track of the different types of divergences can be tricky. This cheat sheet simplifies everything, providing you with a quick reference to identify regular and hidden divergences and understand their implications.

What Is Divergence?

Divergence occurs when the price action of an asset moves in the opposite direction of a technical indicator, typically a momentum oscillator like RSI, MACD, Stochastic, or CCI. Divergences are categorized into two types:

Regular Divergence: Signals potential trend reversals.Hidden Divergence: Indicates trend continuation.

Each divergence type can exhibit either a bullish or bearish bias.

Regular Divergence: Signs of a Trend Reversal

Regular divergence occurs when price action and an oscillator disagree, signaling that the current trend might be reversing.

BiasPriceOscillatorDescriptionExampleBullishLower Low (LL)Higher Low (HL)Indicates weakening bearish momentum. Suggests a possible reversal to an uptrend.Example: Price forms LL, Oscillator forms HL → Buy opportunity.BearishHigher High (HH)Lower High (LH)Indicates weakening bullish momentum. Suggests a possible reversal to a downtrend.Example: Price forms HH, Oscillator forms LH → Sell opportunity.

Hidden Divergence: Signals for Trend Continuation

Hidden divergence supports trend-following strategies by indicating that the current trend is likely to persist.

BiasPriceOscillatorDescriptionExampleBullishHigher Low (HL)Lower Low (LL)Indicates underlying strength during retracements in an uptrend. Suggests re-entry into the trend.Example: Price forms HL, Oscillator forms LL → “Buy the dips.”BearishLower High (LH)Higher High (HH)Indicates underlying weakness during retracements in a downtrend. Suggests re-entry into the trend.Example: Price forms LH, Oscillator forms HH → “Sell the rallies.”

Common Indicators for Divergence

Divergences can occur with any piece of data, but they are most commonly spotted using momentum oscillators such as:

Relative Strength Index (RSI)MACD (Moving Average Convergence Divergence)Stochastic OscillatorCommodity Channel Index (CCI)Williams %R

Key Takeaways for Divergence Trading

Regular Divergence: Look for signs of trend reversal.

Bullish: Lower Low (Price), Higher Low (Oscillator)Bearish: Higher High (Price), Lower High (Oscillator)

Hidden Divergence: Look for signals of trend continuation.

Bullish: Higher Low (Price), Lower Low (Oscillator)Bearish: Lower High (Price), Higher High (Oscillator)

Pro Tips for Divergence Success

Stick to Momentum Oscillators: Use reliable tools like RSI, MACD, or Stochastic for consistency.Combine with Other Tools: Use support/resistance levels, trend lines, or candlestick patterns for confirmation.Practice Patience: Don’t rush into trades; wait for clear divergence signals.

Quick Access for Future Use

Divergences can be confusing, but with this cheat sheet, you have everything you need to quickly spot and understand divergence setups. Bookmark this guide or save it for reference to avoid mixing up higher lows, lower highs, and other key signals.

With practice and discipline, divergence trading can become a cornerstone of your technical analysis strategy.

START HERE: Divergence Cheat Sheet: Your Quick Reference for Spotting Divergences

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