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Cryptocurrency Trading Divergence Cheat Sheet
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Divergence in cryptocurrency trading is the separation of two lines or paths.Lines feature prominently in crypto trading and are seen on charts and multiple indicators, making divergence a common sight.
While price moves one way, other indicators can move in the opposite direction.
To the untrained eye, this divergence may mean nothing.
However, professional traders are always on the lookout for divergence because it can give key trading signals to support market analysis.
Two common indicators that are used by traders to look for divergence against price are Relative Strength Index (RSI) and On-Balance Volume (OBV).
There are four types of divergence to look out for: two indicate bullishness while the other two are bearish.
Bullish divergence signals
For bullish divergence signals, remember you are always looking at the lows.
Bullish Divergence is found when the price prints a lower low, but a corresponding indicator prints a higher low.
Notice in the picture below that the price has two noticeable low points, where the second one is clearly lower than the first. Directly underneath both of these points are two low points for the RSI indicator, but the second low is higher than the first.
In the picture below you can see a higher lower form on the price chart, while the RSI is showing a lower low.
Bearish Divergence Signals
When you are looking for bearish divergence signals you are looking only at the highs.
Bearish divergence is seen when the price prints a higher high, but the corresponding indicator shows a lower high.
The second high point in the picture below is higher than the first one, but as the price increased, the RSI decreased and formed a lower high.
Hidden bearish divergence is found when the price shows a lower high, but the corresponding indicator shows a higher high.
The picture below shows a lower high in the price, while the RSI prints a higher high.
While you have your eyes on the charts, look out for the divergence patterns above. If you spot a bullish divergence pattern, you could take this as a positive signal and add it to your current market outlook.
A bullish signal suggests that the price may increase in the future.
On the other hand, a bearish signal is negative, and suggests that the price may decline.
Neither signal is definitive, but you can combine your findings with other technical analysis to reach a conclusion you are happy with.
Listen to what other parts of the chart are telling you, such as volume, to get a more holistic, in-depth reading of potential future movement.