Master the Divergence Cheat Sheet: Your Complete Guide to Identifying Trading Signals

If you’re serious about technical analysis, understanding divergence is essential. This divergence cheat sheet provides a systematic way to identify potential market reversals and trend continuations by comparing price action with RSI (Relative Strength Index) indicators. This powerful analytical tool helps traders spot critical trading opportunities before they fully materialize.

Understanding Divergence and Price Action vs RSI Indicators

Divergence occurs when price and an indicator move in opposite directions. This creates a mismatch between what the price chart shows and what the RSI momentum indicator reveals. There are four main types of divergence, each sending distinct signals about potential market moves. By recognizing these patterns in real-time, traders can make more informed decisions about timing their entries and exits.

The core principle is straightforward: when price makes new highs or lows but the RSI fails to confirm this movement, divergence signals a possible shift in market direction or a continuation of the existing trend. This divergence cheat sheet organizes these patterns into two primary categories for easier identification.

Regular Divergence: Spotting Potential Reversals

Regular divergence indicates that a reversal is likely approaching. This occurs when price and RSI move in opposite directions in a way that contradicts the current trend.

Regular Bullish Divergence appears at market bottoms: Price creates lower lows while RSI creates higher lows. This divergence pattern suggests the downtrend is weakening, and an upside reversal could follow. Lower prices accompanied by higher RSI readings indicate the selling pressure is decreasing despite lower price levels.

Regular Bearish Divergence appears at market tops: Price creates higher highs while RSI creates lower highs. This divergence signals that the uptrend is losing momentum, potentially leading to a downside reversal. Even though price reaches new highs, the RSI’s failure to confirm suggests bullish strength is fading.

Hidden Divergence: Recognizing Trend Continuations

Hidden divergence signals that the current trend will likely persist. Rather than predicting reversals, this divergence cheat sheet category reveals when pullbacks or retracements are temporary, and the dominant trend remains intact.

Hidden Bullish Divergence forms during uptrends: Price makes higher lows (as expected in a rally), but RSI creates lower lows. This divergence suggests the uptrend will continue after this pullback, as the price is holding support even while momentum temporarily retreats.

Hidden Bearish Divergence forms during downtrends: Price makes lower highs (consistent with a decline), but RSI creates higher highs. This divergence indicates the downtrend will persist, as price weakness continues despite a temporary bounce in the RSI momentum indicator.

Quick Reference and Trading Applications

To quickly apply this divergence cheat sheet in your trading:

1. Identify the current trend — Is price rising or falling?
2. Compare price extremes — Are new highs/lows being formed?
3. Check RSI extremes — Is RSI confirming or diverging from price?
4. Classify the divergence — Is it regular (reversal signal) or hidden (continuation signal)?
5. Confirm with support/resistance — Use key levels to validate potential turning points.

Regular divergence offers reversal signals with lower lows paired with higher lows (bullish) or higher highs paired with lower highs (bearish). Hidden divergence provides continuation signals when higher lows show lower RSI (bullish) or lower highs show higher RSI (bearish). Mastering this divergence pattern recognition significantly improves your ability to anticipate market movements and strengthen your technical analysis toolkit.