Definition
Divergence
Divergence occurs when price and an indicator like RSI or MACD move in opposite directions, warning of a possible reversal.
A bullish divergence appears when price makes a lower low but the indicator makes a higher low, hinting that selling momentum is fading. A bearish divergence is when price makes a higher high but the indicator makes a lower high, suggesting the rally is weakening. It signals that the trend's underlying strength is waning.
Indian traders spot divergence on Nifty, Bank Nifty, and stocks using RSI, MACD, or the stochastic, treating it as an early caution rather than an instant trade. Divergence can persist for a while in strong trends, so it is best confirmed by a price-action trigger or a break of structure.
Related terms
- MACDMACD (Moving Average Convergence Divergence) is a momentum indicator built from the difference between two moving averages.
- Stochastic OscillatorThe stochastic oscillator compares a closing price to its recent range to flag overbought and oversold conditions.
- TrendlineA trendline is a straight line connecting a series of highs or lows to visualise the direction and slope of a trend.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.