Divergence Trading

Divergence Trading

Divergence occurs when price and an indicator move in opposite directions, signaling potential trend change or continuation.

Divergence Types

Regular Divergence (Reversal)

Hidden Divergence (Continuation)

Multi-Indicator Detection

RSI, MACD, and Stochastic are correlated transforms of price, while MFI also uses volume. Do not count them as independent votes or map the count to probability; compare each feature and any combination with a price-only baseline.

Validation Rules

• Use an objective pivot algorithm with fixed left/right bars or ATR reversal and exclude the unconfirmed right-edge pivot.
• Calibrate minimum/maximum spacing and optional oscillator zones by instrument/timeframe.
• Match indicator values at the exact price-pivot timestamps; use closed data and specify equality tolerance.

Workflow

1. Get indicator data:

   get_indicators(indicator_code="rsi", symbol=<symbol>, exchange=<exchange>, interval=<interval>)
   get_indicators(indicator_code="macd", symbol=<symbol>, exchange=<exchange>, interval=<interval>)
   get_indicators(indicator_code="stoch", symbol=<symbol>, exchange=<exchange>, interval=<interval>)
   

2. Compare swings: For each indicator, identify last two significant peaks/troughs and compare direction vs price direction

3. Evaluate: report each divergence and contextual feature separately; use a numeric score only if calibrated on held-out labels.

4. Get candles for chart drawing:

   get_candles_around_date(symbol=<symbol>, exchange=<exchange>, interval=<interval>, date=<date>)
   

5. Mark divergence on chart:

   draw_chart_analysis(action="create", drawing={
       "type": "trend",
       "points": [
           {"time": <first_low_time>, "price": <first_low_price>},
           {"time": <second_low_time>, "price": <second_low_price>}
       ],
       "options": {"text": "Bullish Divergence (RSI + MACD)"}
   })
   

6. Wait for confirmation candle (engulfing, hammer, pin bar) at the divergence zone before entry

Evidence and Validation

• Treat the setup as a testable hypothesis, not a prediction. Define thresholds, entry, invalidation, and exit before evaluating outcomes.
• Calibrate on the same instrument, venue, session, and timeframe. Use closed candles and a held-out or walk-forward sample; record every variant tried.
• Include spread, fees, slippage, borrow or funding, partial fills, and latency. Reject the setup when net expectancy is not positive or depends on one narrow parameter.
• Return observed inputs, missing data, cost assumptions, entry, invalidation, exit, and a valid, watch, or no-trade status.
• Research basis: The technical-analysis evidence review finds mixed performance and common data-snooping problems; multiple correlated oscillators do not create independent confirmation.

Key Rules

• Do not treat multiple price-derived oscillators as independent confirmation.
• Calibrate oscillator zones rather than declaring mid-range values meaningless.
• Define an objective closed-bar entry and invalidate beyond the second pivot plus buffer.
• Test timeframe and regime interactions; no timeframe is universally more reliable.
• Keep unresolved divergences and failures in the evaluation sample.
• Entry on confirmation candle close; stop beyond the second divergence swing point

Related Skills

• rsi-divergence — focused RSI divergence framework; this skill extends it to multiple indicators
• macd-trading — MACD histogram divergence is one of the four indicators in multi-indicator scoring