What is Divergence in Trading?

Divergence in trading occurs when the price of an asset and a technical indicator move in different directions. For example, 

• Suppose a stock makes a “higher high” while an oscillator such as RSI makes a “lower high”.
• Now, this shows that both the indicators are “diverging”. 
• Traders may monitor this as a potential indication that the existing price momentum is weakening.

Note: Divergence does not necessarily mean that a reversal will occur. Price can continue moving in the same direction despite divergence.

What are Bullish and Bearish Divergence with RSI and MACD?

In a “bullish divergence,” the price makes a lower low while the indicator makes a higher low. This can indicate weakening downward momentum. Whereas, in a “bearish divergence”, the price makes a higher high while the indicator makes a lower high. This can indicate weakening upward momentum.

Let’s gain more clarity and see how both RSI and MACD can be used to identify divergence:

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