TL;DR
- In the cryptocurrency market, price divergence, both bullish and negative, can occasionally predict future price direction.
- Higher chart time periods frequently produce outcomes with greater strength and effect.
- When performing technical analysis, combining market signals for confluence might be crucial.
The most important issue in the world of cryptocurrencies is where will the price of bitcoin go from here? Price divergence can occasionally be utilized to assist provide an answer to that issue, but nobody can completely predict future price movement until it actually occurs.
When price records higher highs while indications show lower lows, or vice versa, this is known as divergence. Divergence, to put it simply, is a pattern of apparent conflict between price and indication direction.
A positive divergence between price movement and the Relative Strength Index can be seen on the Bitcoin daily chart, which is seen above (RSI – Purple line). While the RSI displayed an upward trend, the price clearly displayed a negative trend. This indicates that, despite possible price declines, market sentiment is becoming more positive.
As seen in the previous example of the daily bitcoin chart, this idea also operates in the other direction. A clear negative divergence was visible throughout bitcoin’s ascent to reach new all-time high prices twice: in November and December 2017 when BTC rose near $20K and lost over 80% in a year, and again during the current ATH of approximately $65K, which was set in April 2021.
In both instances, the RSI displayed a negative pattern as the price ascended toward its top, signaling a market reversal or bearish divergence.
Divergences must be considered with regard to their time spans, much like many other chart patterns and ideas. Although it’s crucial to keep in mind that higher time frame divergences frequently carry greater weight and significance, divergences may frequently be seen in a variety of time frames, including short-term charts like the 15-minute chart. In other words, if you are too concentrated on the here and now, it might be easy to miss the wider picture.
The second most common sort of divergence after the ordinary one is the concealed one. Contrary to normal divergence, which signals a trend reversal, hidden divergence signals trend persistence.
Please use the divergence cheat sheet provided below. As you can see, when the price makes lower/higher lows and the indicator produces higher/lower lows, there is a bullish/bearish hidden divergence.
HOW TO TRADE A DIVERGENCE – THE OPTIMAL ENTRY
A divergence does not always lead to a strong reversal and often price just enters a sideways consolidation after a divergence. Keep in mind that a divergence just signals a loss of momentum, but does not necessarily signal a complete trend shift.
I strongly advise you to bolster your armory with additional criteria and confirmation tools in order to prevent trade entries that go nowhere. Divergences by themselves are not powerful enough to trade on, and many traders lose money when they do so. To strengthen your method, just as with any trading technique, you must add more confluence elements.
The price produced two divergences as seen below, but it never fell. Thus, the divergences only underlined recent consolidation.
