Indicators
Divergence
Price makes a new high or low but the indicator does not, showing the new extreme came with less force. A warning to wait for confirmation, not an entry by itself.
In practice
EUR/USD makes a higher high at 1.1100, but RSI makes a lower high than it did at the previous price peak. Price went up while momentum went down — bearish divergence, a warning that the new high may not hold.
Why it matters for traders
Divergence is one of the earliest warnings of a tired trend, often appearing before any price reversal, which makes it valuable for timing exits and avoiding late entries. But it is a caution signal, not a trigger — acting on divergence without a confirming price reversal is a classic way to get stopped out by a trend that simply keeps going.
Common pitfall
The pitfall is acting on divergence the moment it appears, then getting stopped out as the trend simply continues. Divergence is a warning, not a trigger, and can persist across many candles in strong trends. Wait for a confirming price reversal — a break of structure or a reversal pattern — before acting. Also ensure the divergence is clear on a higher timeframe; minor divergences on a 5-minute chart are usually just noise.
Lessons that use this term
- SMT divergence
Reading divergence between two correlated instruments when one fails to confirm the other's high or low.
Related terms
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