9 Rules for Trading Divergences

9 Rules for Trading Divergences

Divergences are used by traders to determine if a trend is getting weaker, which may lead to a trend reversal or continuation. Before you start applying divergences, here are nine essential rules to follow.

Learn them, memorize them, and apply them to improve your trading decisions. Ignore them and go broke.

1) Make sure your glasses are clean
For divergence to exist, price must form one of the following:
• Higher high
• Lower low
• Double Top
• Double Bottom

If none of these happen, there is no divergence—stop imagining things!

2) Draw lines on successive tops and bottoms
Look at recent price action and draw lines ONLY on major swing highs or swing lows. Ignore the small bumps in between.

3) Connect TOPS and BOTTOMS only
If price forms two highs, connect the highs. If price forms two lows, connect the lows. Simple as that.

4) Keep Your Eyes on the Price
Compare price action tops or bottoms to indicator tops or bottoms. Indicators like MACD and Stochastic may look messy—focus on the main swing points.

5) Be Consistent With Your Swing Highs and Lows
If you connect highs on price, connect highs on the indicator too. If you connect lows on price, match lows on the indicator. They must align.

6) Keep Price and Indicator Swings in Vertical Alignment
The highs or lows on the indicator must align vertically with the highs or lows on price. They must be matching points.

7) Watch the Slopes
Divergence exists only if the slope of the price line differs from the slope of the indicator line—ascending, descending, or flat.

8) If the ship has sailed, catch the next one
If divergence has already played out and price reversed long ago, you missed the opportunity. Wait for the next swing structure.

9) Take a Step Back
Divergence signals are more reliable on higher timeframes like 1-hour and above. Lower timeframes have too much noise.

This means fewer trades but if you structure your trade well, then your profit potential can be huge. Divergences on shorter time frames will occur more frequently but are less reliable. We advise only look for divergences on 1-hour charts or longer. Other traders use 15-minute charts or even faster. In those time frames, there’s just too much noise for our taste so we just stay away.