Divergence can be identified from the oscillating indicators, the most well liked of which are the MACD, Stochastic and RSI. Any of these running on your day trading chart with prices in either candlesticks or bar chart form can be employed.

Bearish Divergence

Bearish divergency exists when the price chart is seemingly bullish but the oscillator is showing a bearish trend. However, a line drawn across the highest highs of the oscillating indicator will show a falling trend.

If you’re in this market going long, it is time to get out. If you have a signal to open a trade to go long, the deflection is signalling you not to do it. If you’ve got a signal to open a trade to go short, on the other hand, the divergence is confirming that and you can go ahead. Here a line across the lowest lows of the price chart will show bearish (downward) movement, while a line across lowest lows of the oscillator will be moving upward. The signal is the opposite to the previous one. The deflection is signalling the bearish trend is coming to a close so you can close short trades and open long trades if that fits with the other signals of your system. Naturally no system is 100% correct and that is applicable to using deflection in trading just the same as anything more. But attempting to find divergence as well as your usual system could be a very powerful way to contribute to the success of your system. Increase your profits by spotting patterns in deviation from the signals on your day trading chart.