Divergence Trading is a Complete Waste of Time (and Money)

If you been trading for a while you know that divergences are…

A divergence occurs when the market doesn’t behave in the same way oscillators do.

Let say the market makes a higher high (or a lower low), but the oscillator (RSI, CCI, Stochastics, etc) fails to make a similar high (or low)… that’s a divergence.

The idea is that, since the indicator doesn’t agree with the market, “something” might happen, like a major reversal, consolidation period, etc.

So here is what I think…

My take on Divergence Trading

Trading divergence is like saying, the market will go down just because it’s been moving up?

Does it make sense?

Of course not! That’s non sense!

In fact, the opposite is what its true… The market is more likely to continue its way up when in the last periods, the markets have been moving up overall…

That simple traders!

The easiest way to trade is by following the markets, not by betting against them…

Please quit that contrarian view, and stop thinking that the market will retrace back just because its been moving up…

Let me show you some charts…

This is Bitcoin 4H charts, its been moving up, RSI divergence has been telling us that it’s about time we get a pullback…

When in fact, it has been making historial highs…

Here is another one:

This is the EURJPY 4H chart… Again, the RSI Divergence is telling us that a reversal is imminent… When in fact, the EURJPY might be just taking some rest…

Every single time the market moves up (or down), and the market stops for a while, you’ll a get a divergence reading… You will also get a Divergence reading when the market is moving very fast, then for some reason, it keeps moving up but not as fast as it was at the beginning… you’ll get a divergence reading..

But that doesn’t mean that a reversal is imminent.

For instance, lets say there was a very sharp move during the american session, then during the asian session as the market has less volume, the market stalls for a while… This happens not because its about to reverse, its just that the market has less volume…

Doesnt matter if you are using RSI, CCI, stochastics or any other oscillator… That’s what oscillators are supposed to behave. They oscillate between two levels, so they cant reach similar “highs” or “lows” as price does…

Dont take your trading decisions relying only on Divergences…

Make an objective analysis instead, look for near by support and resistance levels, see of the market has been rejected around those levels, see if there is candlestick pressure around those zones, etc.

Your Turn

What do you think about divergences?
Do you trade them?
Do you agree with me?

Leave a comment

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Raul Lopez

I've been trading the markets for more than 15 years. I believe the best way to trade is by adapting to the market conditions. You can learn it too, join our community .

  • Soutie

    Hi Raul – not all divergences are created equal. I have a divergence-based setup called a P5 using the eWavesHarmonics indicator. It is a strong indicator of the possible end to a corrective wave; a chance to buy the dips and sell the rallies. We don’t trade negative divergence (particularly of an impulsive wave, as your pictures appear to show), we use it to alert to an opportunity (it’s an easy thing to code), then trade the price action in the direction of the dominant trend. I’ve also been trading for well over a decade and I can say, with all conviction, that divergence can be extremely useful.

    • Raul Lopez

      Hello Steve, sounds like a good plan you’ve got there…

      The main point here is, it is very important to understand that the nature of oscillators is to produce divergences… that’s what they are meant to do, because they oscillate between two levels, sooner or later, we are going to get them…

      So basically, when you trade using divergences, you are trying to go short, when the market in fact, has been moving up (and vice versa)…

      In my opinion, there is no better place to go long, than when the market has been moving up…

      What do you think?

  • Maryna Murray

    Hi Raul, as usual, a very interesting subject as I know a few traders who are (obsessed?) with divergence and then miss good trades. I’m 100% with you on this one as well! However, I really appreciate your good description of divergence and reasons for it as I never hear traders mention the reasons you gave! Thank you!

    • Raul Lopez

      Hello Maryna… Glad you are with me on this one as well!

      Thank you for your comment…