Divergence in gold trading
Divergence occurs when gold's price makes a new high or low but a momentum indicator such as RSI or MACD does not, warning that the move is losing force.
Also called RSI divergence, Momentum divergence, Hidden divergence
Divergence is a disagreement between price and an indicator. Regular bearish divergence: price makes a higher high while RSI or MACD makes a lower high. Regular bullish divergence: price makes a lower low while the indicator makes a higher low. Hidden divergence is the reverse pattern inside a trend (price makes a higher low, indicator a lower low) and is read as continuation. In Smart Money vocabulary, SMT divergence applies the same logic between two correlated markets instead of an indicator.
How it applies to gold trading
Divergence on the 1-hour and 4-hour gold charts tends to appear at the end of extended moves, when the final push to a new high happens on less momentum than the previous one. It is a warning that the rally is tiring, not a signal to sell: gold can print three or four divergences during a strong trend before reversing. Traders use it to tighten stops, take partial profit or wait for a structure break before entering against the trend.
Divergence is more reliable at a known level, such as a daily resistance or the edge of a range, than in open space.
The RSI divergence lesson includes worked gold examples of regular and hidden divergence and the structure confirmation that turns the warning into a trade.
A common mistake
Shorting a gold rally on the first bearish divergence. Without a change in structure, divergence is a comment on momentum, and momentum can recover.
See also: RSI, MACD, SMT divergence, CHoCH.
Frequently asked questions
Is divergence a reliable reversal signal on gold?
It is a reasonable warning and a poor trigger. Combined with a level and a structure break, it improves the odds; on its own it fails often in strong trends.
What is hidden divergence?
Price makes a higher low while the indicator makes a lower low (in an uptrend), or the reverse. It is read as a sign the trend will continue after the pullback.