Divergences

Understanding Divergences in Cryptocurrency Trading

Welcome to the world of cryptocurrency trading! This guide will explain a powerful concept called “divergences”. Divergences can help you identify potential turning points in the price of a cryptocurrency, potentially improving your trading strategy. Don't worry if this sounds complicated - we'll break it down step-by-step.

What is a Divergence?

In simple terms, a divergence happens when the price of a cryptocurrency and a technical indicator are moving in *opposite* directions. Think of it like this: the price is saying one thing, but the indicator is saying something different. This disagreement can signal that the current price trend might be losing steam and could reverse. It's not a guaranteed prediction, but it's a valuable clue.

Let’s understand the two main parts:

• **Price:** This is simply the current value of the cryptocurrency, like the price of Bitcoin or Ethereum.
• **Technical Indicator:** These are mathematical calculations based on price and volume data. They help traders visualize trends and potential reversals. Common indicators include the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Stochastic Oscillator. We’ll focus on RSI and MACD for this guide.

Types of Divergences

There are two main types of divergences:

• **Bullish Divergence:** This occurs when the price makes lower lows (new lower prices), but the indicator makes *higher* lows. This suggests that selling pressure is weakening, and the price might soon go up. This is a good signal to consider a long position.
• **Bearish Divergence:** This happens when the price makes higher highs (new higher prices), but the indicator makes *lower* highs. This suggests that buying pressure is weakening, and the price might soon go down. This is a signal to consider a short position.

Example using RSI

Let’s say you're looking at a chart of Litecoin.

1. The price of Litecoin drops to $40, then drops again to $30 (lower lows). 2. At the same time, the RSI indicator drops, but *not* as low as the first time. It drops from 40 to 30, then rises to 35 (higher lows).

This is a bullish divergence! It suggests the downward trend might be ending, and the price could rise.

Example using MACD

1. The price of Cardano increases to $0.50 then increases again to $0.60 (higher highs). 2. At the same time, the MACD indicator increases, but *not* as high as the first time. It increases from 10 to 15, then drops to 12 (lower highs).

This is a bearish divergence! It suggests the upward trend might be ending, and the price could fall.

Regular vs. Hidden Divergences

Beyond bullish and bearish divergences, there are regular and hidden types.

• **Regular Divergences (explained above):** Signal potential *trend reversals*.
• **Hidden Divergences:** Signal potential *trend continuations*. These are less common but can be powerful. A bullish hidden divergence suggests the uptrend will continue, while a bearish hidden divergence suggests the downtrend will continue.

Here's a comparison:

Divergence Type	Price Action	Indicator Action	Signal
Bullish (Regular)	Lower Lows	Higher Lows	Potential Price Increase
Bearish (Regular)	Higher Highs	Lower Highs	Potential Price Decrease
Bullish (Hidden)	Higher Lows	Lower Lows	Potential Trend Continuation (Up)
Bearish (Hidden)	Lower Highs	Higher Highs	Potential Trend Continuation (Down)

Practical Steps for Identifying Divergences

1. **Choose an Exchange:** Start by selecting a reliable cryptocurrency exchange. I recommend starting with Register now or Start trading. 2. **Select a Cryptocurrency:** Choose a cryptocurrency you want to analyze. 3. **Choose an Indicator:** Start with the RSI (period 14 is common) or the MACD (default settings are a good starting point). 4. **Look for Disagreements:** Visually scan the price chart and the indicator. Look for situations where the price is making new highs or lows, but the indicator isn’t confirming them. 5. **Confirm with Other Indicators:** Don't rely solely on divergences. Use other technical analysis tools like support and resistance levels, trendlines, and chart patterns to confirm your analysis. 6. **Consider the Volume:** Trading volume can help confirm the strength of a divergence. Increasing volume during a divergence often makes it more reliable.

Important Considerations

• **Divergences aren't foolproof:** They provide *potential* signals, not guaranteed outcomes.
• **Timeframe matters:** Divergences on longer timeframes (e.g., daily or weekly charts) are generally more reliable than those on shorter timeframes (e.g., 5-minute or 15-minute charts).
• **False signals:** Divergences can sometimes give false signals, especially in choppy or sideways markets.
• **Risk Management:** Always use proper risk management techniques, such as setting stop-loss orders, when trading based on divergences.

Further Resources

• Candlestick Patterns
• Fibonacci Retracement
• Bollinger Bands
• Moving Averages
• Trading Bots
• Market Capitalization
• Decentralized Exchanges (DEXs)
• Fundamental Analysis
• Swing Trading
• Day Trading
• Join BingX
• Open account
• BitMEX

Conclusion

Divergences are a valuable tool for cryptocurrency traders, helping to identify potential turning points in the market. By understanding the different types of divergences and how to use them in conjunction with other technical analysis tools, you can improve your trading decisions and potentially increase your profits. Remember to practice, manage your risk, and continue learning!

Recommended Crypto Exchanges

Exchange	Features	Sign Up
Binance	Largest exchange, 500+ coins	Sign Up - Register Now - CashBack 10% SPOT and Futures
BingX Futures	Copy trading	Join BingX - A lot of bonuses for registration on this exchange

Start Trading Now

• Register on Binance (Recommended for beginners)
• Try Bybit (For futures trading)

Learn More

Join our Telegram community: @Crypto_futurestrading

⚠️ *Disclaimer: Cryptocurrency trading involves risk. Only invest what you can afford to lose.* ⚠️