Divergences occur when the price of an asset and a financial indicator begin branching apart and trending against each other. The main indicators that traders use to gauge these trends are the Moving Average Convergence Divergence (MACD), the Relative Strength Index (RSI), the Stochastic RSI, and On Balance Volume (OBV).
There are four types of divergences as depicted above. Regular Bullish, Regular Bearish, Hidden Bullish, and Hidden Bearish.
Regular divergences signal a potential trend REVERSAL. If there is a bearish trend with price and the indicator showing regular bullish divergence, this could indicate that the bearish trend will reverse into a bullish trend soon. Likewise, if there is a bullish trend and the charts are showing regular bearish divergence, this could point to the bullish trend flipping bearish in the near future.
Here is a live example of regular bullish divergence on the Bitcoin weekly chart using the
On Balance Volume indicator.
Hidden divergences, on the other hand, signal a potential trend CONTINUATION. So if there is a bullish trend and the chart shows hidden bullish divergence, this means that it's likely for the bullish trend to continue. Conversely, if there is a bearish trend and the price/indicator are flashing hidden bearish divergence, this bearish trend is likely to remain in the coming future.
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