Divergence with RSI and MACD

Price makes a new high and RSI does not. Plenty of videos call that a sell signal. Sometimes price turns; often it climbs for another week.

Regular divergence

Period:

Illustrative EUR/USD H4 prices in an uptrend. The lines join the same two candles on price and on RSI.

Divergence means price and an oscillator disagree at two swing points. You compare two swing highs (or two swing lows) on price with the oscillator’s readings at the same two candles.

Regular bearish: price makes a higher high, the oscillator a lower high. The latest push covered new ground with less momentum behind it.
Regular bullish: price makes a lower low, the oscillator a higher low. The fall is slowing.

In the chart, the two highs close at 1.0868 and 1.0883 while RSI(14) drops from 87 to 76. MACD agrees: its line reads about 22 pips at the first high and 15 at the second. Move the period slider and the divergence stays at every setting from 5 to 21 on this chart. On real charts a different setting, or a different choice of swing point, can make one appear or vanish.

Hidden divergence

Tap Hidden divergence on the chart above. Hidden divergence runs the other way and is read as a sign the trend is still intact.

Hidden bullish: in an uptrend, price makes a higher low while the oscillator makes a lower low. The pullback was sharp in momentum terms, but price held above its previous low.
Hidden bearish: in a downtrend, price makes a lower high while the oscillator makes a higher high.

Here the lows close at 1.0781 and 1.0807, a higher low, while RSI falls from 58 to 45.

A warning, not a signal

Divergence says momentum has slowed. Slowing is not reversing. A trend can lose speed and carry on, and in a strong trend divergence often appears two or three times in a row before any real turn, with each early sell stopped out.

It also gives no timing and no target. We know of no reliable published figure for how often divergence leads to a reversal; any number depends on the pair, the timeframe, the settings and how you define a swing. If you want to use it, count it yourself in a backtest.

Treat divergence as a reason to watch, then let price confirm. For a bearish divergence, that means a close below the most recent swing low.

Example: waiting for confirmation after a bearish divergence

EUR/USD H4 makes highs at closes of 1.0868 and 1.0883; RSI(14) reads 87 then 76. Regular bearish divergence.
You do not sell at 1.0883. Price dips and bounces, leaving a small swing low at 1.0872. You wait for a close below it.
Five candles after the high, a candle closes at 1.0866. You sell there, with the stop above the high at 1.0890: 24 pips of risk.
Account $5,000, risk 1% = $50. Size: $50 ÷ (24 × $10) = 0.208, rounded down to 0.20 lots. Money at risk: 24 × 0.20 × $10 = $48.
Waiting cost 17 pips of entry (1.0883 − 1.0866). In exchange, the times the divergence simply fades never trigger a trade at all.
If price turns back up through 1.0890, the loss is $48, about 1% of the account. Leverage makes the position bigger than the deposit, so the stop has to be in place from the start.

Try it

EUR/USD has just made a higher high at 1.0891, while RSI(14) made a lower high: 86 at the first peak, 77 now. The last swing low is 1.0863. What do you do?

Illustrative EUR/USD H4 prices. RSI values are calculated from these closes.

Reveal the rest and look for a close below 1.0863. It never comes: the uptrend resumes and runs to 1.0962, which is what happens to many divergences in a strong trend.

Quick check

Question 1 of 4
Price makes a lower low; RSI makes a higher low. What is this?
Question 2 of 4
In an uptrend, price makes a higher low while RSI makes a lower low. How is it usually read?
Question 3 of 4
Why is divergence a warning rather than a signal?
Question 4 of 4
Risk $50 with a 25-pip stop on EUR/USD. What size, rounded down?

Go deeper: RSI indicator explained · MACD indicator explained