When price makes a new high and the indicator does not, the market seems to say two different things. That is divergence, one of the best-known signals in technical analysis.

What divergence is

Divergence is a mismatch between price and an oscillator, most often RSI or MACD. Price shows direction; the indicator shows the strength of that move. When direction holds but strength fades, the trend is likely running out of steam.

Four types

Bearish (regular). Price makes a higher high, the indicator a lower high. The rally is weakening and a reversal down is possible.

Bullish (regular). Price makes a lower low, the indicator a higher low. The decline is weakening and a bounce is possible.

Hidden bullish. Price makes a higher low, the indicator a lower low. A sign the uptrend continues after a pullback.

Hidden bearish. Price makes a lower high, the indicator a higher high. The downtrend continues.

How to spot it

Compare only neighbouring swings: the last two highs or the last two lows. Draw lines across the peaks on price and on the indicator; they should point in opposite directions. Divergences are more reliable from the 4-hour time frame up.

Common mistakes

Divergence signals weakening, not a turning point. In a strong trend you can see three or four divergences in a row while price keeps going. So look for confirmation to enter: a break of a local level, a reaction at a large order book wall, or a sweep of a cluster on the liquidation heatmap.