Divergence

Divergence in technical analysis happens when the price of an asset moves in one direction while a technical indicator, such as the Relative Strength Index (RSI) or MACD, moves in the opposite direction. For example, if price makes a higher high, but the indicator makes a lower high, it signals bearish divergence. This mechanical discrepancy suggests that the underlying momentum supporting the price trend may be weakening.

For a retail trader, divergence can act as an early warning signal, indicating that an existing trend might be losing strength or preparing to reverse. It is not a standalone trade signal but rather a confirmation tool to support other analysis methods, like identifying support and resistance levels. Relying solely on divergence without additional confirmation can lead to premature entries and increased risk, as trends can persist despite conflicting indicator signals.