What is a bearish divergence?

A bearish divergence is defined on a chart when prices make new higher highs but a technical indicator that is an oscillator doesn’t make a new high at the same time. This is a signal that bullish sentiment is losing momentum with the high probability that sellers are stepping in and the market may be near a top on the chart’s time frame.

What is a high probability bearish divergence setup?

The below case study is a perfect example of a high probability bearish divergence setup. Let’s walk through the process behind identifying and executing on this pattern. The best bearish divergence setups occur when a market is in an overall bearish trend but currently within a counter-trend pullback.

What does the direction of a divergence mean?

The direction of the divergence usually indicates whether the price’s change in momentum will be bullish or bearish, although there may be a delay between the divergence and the actual price reversal. False positives can occur when a price change does not follow the divergence.

How do I identify a divergence?

When looking to identify a divergence, you are watching both the price and your indicator of choice. You should look first at price action and whether it has been moving in any significant direction. Then, check your indicator below for peak formations signaling a divergence.