Bullish and Bearish Divergence Cheat Sheet (PDF)

Divergence cheat sheet as a PDF represents an interesting concept when trading. Indeed, its principal purpose is to give a sign when momentum building up into a tendency. Also, it provides traders with an early warning signal when there is a slowdown in the ongoing trend which can lead to an upcoming price reversal movement. However, the divergence cheat sheet doesn’t tell when the reversal will occur. Despite this, traders tend to frequently use this technique within different analytical tools. For instance, two of the most popular approaches are the RSI divergence cheat sheet and the MACD divergence cheat sheet.

During this tutorial, we will introduce to you the trading concept ” divergence cheat sheet” as well as explain its different types (regular divergence and hidden divergence) passing through some illustrated examples.

Divergence cheat sheet

What is Divergence Cheat Sheet ?

Practically, the concept of a divergence cheat sheet in our PDF refers to the same traditional divergence approach. In fact, it represents the mismatch between the price action and the technical instrument that we use. In other words, a divergence cheat sheet occurs when there is no synchronization between an asset’s price movements and an indicator’s readings. During normal market conditions, traders expect to see the price of financial security and the technical tool move in the same direction. To clarify, when the price reaches a new high level, the technical indicator should reflect that up movement. Therefore, it will create a new higher high. Similarly, when the price drops, drawing new lower levels, the indictor should reflect that down movement. Thus, creating new lower lows. Consequently, a divergence case will take place when both the asset’s price and the indicator, move in two different directions. Regardless, the divergence cheat sheet helps traders to determine when it is a good opportunity to take a long position at a new low and a short position at a new high. Also, it tells traders whether it is about a trend reversal or trend continuation.

What are the different divergence cheat sheet ?

As stated earlier, the divergence cheat sheet occurs when there is a disagreement between the price action and the indicator. In effect, this leads to the appearance of two main types of divergence movements. A bullish and a bearish divergence cheat sheet. Each type consists of a regular and hidden divergence. However, it is very important to mention that: -Regular divergences indicate possible reversal movements. Unlike the hidden divergences that signal the current trend continuation. -When analyzing different financial markets, is very rare to spot hidden divergence. For the simple reason that they don’t happen as frequently as regular divergence. However, contrary to the first type of divergence cheat sheet, the hidden divergence appears within an existing tendency.

Bullish divergence cheat sheet example

  • Regular Bullish divergence

It occurs when we spot a loss of confluence between prices that are dropping (creating new lower lows) and a technical tool that is advancing (creating new higher lows). Thus, this type of divergence indicates that we will potentially see a shift in momentum. A reversal move. Hence, a change in the market’s direction from the downside to the upside. In this regard, we can consider the regular bullish divergence as a buy signal.
Therefore, it is easy to understand that the perfect time and place where a regular bullish divergence can happen is at the end of a downward tendency. As a result, it leads to an upward tendency.

  • Hidden Bullish divergence

It happens when we notice a state of discord between the price trends and the indicator movements. Indeed, the hidden bullish divergence reflects a unique market condition where bulls decide to dominate the underlying market after an important pullback (a down corrective movement). Accordingly, we will see that prices are rising making higher lows while at the same time the indicator prints lower lows. At this point, we can consider the hidden bullish divergence as a confirmation sign that the current uptrend will continue. So, indicates a buy trade.

Divergence cheat sheet

Bearish divergence cheat sheet example

Regular Bearish divergence

It happens when we remark a loss of confluence between prices that are advancing (creating new higher highs) and a technical instrument that is falling (creating new lower highs). Thereby, this type of divergence indicates that we will likely change direction. Hence, turning from an upside to a downside movement. In this regard, we can consider the regular bearish divergence as is a sell signal.

Therefore, it is easy to understand that the perfect time and place where a regular bearish divergence can occur is at the end of an upward tendency. As a result, it leads to a downward tendency.

Hidden Bearish divergence

It occurs when we identify a state of disagreement between the price tendency and the technical tool readings. In fact, the hidden bearish divergence reflects an unusual market situation in which bears take back the lead in the underlying market after an important pullback (an up corrective movement). Thus, the price chart will fall displaying lower highs. While at the same time, the indicator will show higher highs. At this point, we can consider the hidden bearish divergence as a confirmation sign that the current downtrend will continue. So, a sell signal.

RSI divergence cheat sheet example

RSI divergence cheat sheet provides traders with significant signals when the price chart and the Relative Strength Index are no longer displaying the same readings. In other words, this situation appears when both of them (the RSI and the price action) show a different momentum during the same period. Indeed, the RSI is a well-known oscillator for showing the importance of a price movement in a particular time interval. Nevertheless, it offers important indications through divergences.

RSI divergence cheat sheet emerges in a particular financial market when:

  • The price creates new forex lower lows but the RSI on the chart shows higher lows.
  • The price creates higher highs while the RSI shows lower lows.

To explain further, when the RSI stops heading up to higher highs when the price is in an up tendency or stops dropping down to lower lows during a downward tendency then it is considered an RSI divergence cheat sheet.

Hence, it represents a clear signal that the ongoing movement in the timeframe on the chart is about to lose momentum. So, an indication of an upcoming reversal trend in the price action.

Bullish RSI divergence

A bullish RSI divergence cheat sheet takes place when the movement of the oscillator does not conform with the price movements. To clarify, a divergence cheat sheet emerges if the RSI is oscillating in an oversold area and then forms a higher low that may associate with a lower low on the price chart. This can reflect a rising bullish movement. Hence, when the RSI gets out of the oversold area and breaks above the 30-level, we should look for a potential reversal move. An upcoming uptrend. So, an indication for a new long position.

RSI divergence cheat sheet

Bearish RSI divergence

A bearish RSI divergence cheat sheet takes place when the oscillator does not approve the price movements. To explain, a divergence cheat sheet appears if the RSI is oscillating in an overbought zone and then forms a lower high that may associate with a higher high on the price chart. This can signal a falling momentum and a possible overturn in the up tendency. Thereby, when the RSI exit from the overbought area and drops below the 70-level, we should watch for a potential reversal move. An upcoming downtrend. So, an indication for a new short position.

[A breakdown back below an overbought reading is a common profit taking or short selling parameter used to signal a new short position].

MACD divergence cheat sheet example

MACD divergence cheat sheet is a very familiar method in financial markets. It can display the weakness in the price action as well as indicate potential reversal movements.
In fact, the Moving Average Convergence Divergence represents a very basic and useful technical tool. It consists of two components; the line of signals and a histogram. Thus, as a flexible analytical tool, traders can use it either as a trend or momentum indicator. However, the approach of the divergence cheat sheet on the MACD is basically the same as the RSI divergence cheat sheet. The only difference is that on the MACD, we will watch for divergence by looking at the tops and bottoms of the histogram.
One of the most typical configurations of the MACD divergence cheat sheet is to spot significant moves. In which the price creates new picks or new lows on the forex chart. But the MACD histogram does not follow, indicating a price divergence. In this regard, two types of MACD divergence cheat sheet imposes.

Bullish MACD divergence

Indeed, a bullish MACD divergence occurs when the price of a financial asset forms a lower low and the MACD histogram prints a higher low. In this case, the lower low in the price action confirms the ongoing down movement. While the higher low in the MACD histogram indicates a weakness in the downtrend. Despite declining, the down tendency is still dominating the up tendency as long as the MACD histogram remains below the zero line. Hence, we can get a confirmation of a possible trend reversal or a sizable rally when the histogram starts to move above the zero level. So, a good opportunity to go for a long position.

Bearish MACD divergence

A bearish MACD divergence happens when the price of a financial instrument creates a higher high but the MACD histogram records a lower high. In this case, the new pick in the price action affirms the current up movement. While the lower high in the MACD histogram shows a weakness in the uptrend. Despite advancing, the up tendency is still dominating over the down tendency as long as the MACD histogram remains above the zero level. Thus, we can get a confirmation of a probable trend reversal or a sizable decrease when the histogram begins to fall below the zero level. So, a good opportunity to go for a short position.

Bearish macd divergence cheat sheet

Conclusion

In brief, the divergence cheat sheet is not a forex technical tool. Actually, this concept depends mainly on the trader’s visual readings for price charts, and technical indicators. Nevertheless, the divergence cheat sheet works perfectly with all timeframes. In a way, the longer the time interval is, the more accurate the indications tend to be.