Divergence Masterclass 3 - Bearish divergence

5 jun 2021

In the last 2 threads, we have already covered the basics of divergence and learnt everything about bullish divergence. If you have missed those threads, please go through the first 2 threads before reading this one.

Now let's start with our topic, Bearish divergence, which I'll cover in 3 parts:
1. What is bearish divergence?
2. Types of bearish divergence
3. Subtypes with illustrations

What is Bearish divergence?
A bearish divergence occurs when the price rises to a new high while the oscillator fails to reach a new high. It indicates that the buying pressure is decreasing and the bears may soon take over the market. Generally, a bearish divergence occurs at the end of an uptrend.

Bearish divergence is mainly of 2 types:
1. Classic bearish divergence – In this case, the price and the oscillator always either forms a higher high or an equal high. Considering these cases, the classic divergence consists of 3 subtypes. The classic divergence occurs at the end of a bullish trend and indicates a weakness in the underlying trend.

2. Hidden bearish divergence – In this, the price forms a lower high, but the oscillator forms a higher high. Hidden divergence occurs during the correction phase of a trend and is a possible sign for a trend continuation.
So, combining all the above cases, there are only 4 types of Bearish divergence. You don’t have to memorize the names, it’s just a waste of time. Try to understand the underlying logic.

1. Strong Bearish Divergence.
The price makes a higher high but the oscillator makes a lower high. This means that the buyers are not buying at the same momentum i.e. the buying pressure is decreasing.

Price: Higher High (HH)
Oscillator: Lower High (LH)



2. Medium Bearish Divergence

The price makes a double top, almost the same level as the previous high and the oscillator makes a lower high. This indicates that at the same price levels, the momentum is decreasing.
Price: Equal High (EH)
Oscillator: Lower High (LH)



3. Weak Bearish Divergence

In a weak bearish divergence, the price makes a higher high but the oscillator has almost the same high levels. This means, even though the price is increasing, the momentum is intact.
Price: Higher High (HH)
Oscillator: Equal High (EH)



4. Hidden Bearish Divergence
The hidden bearish divergence occurs at less frequency as compared to the other types. In this, the price forms a lower high, but the momentum oscillator forms a higher high. This indicates that even at an increased momentum, there is enough selling going on to push the price down.

Price: Lower High (LH)
Oscillator: Higher High (HH)



Pro Tip:
1. For bullish divergence, we only look at the HIGHS because we are finding the top of an uptrend.
2. Don’t memorize the cases. Just understand that if the divergence is occurring at the highs, then the price will reverse in the opposite direction i.e. it will go down. Hence, you just have to spot the divergence, regardless of the name.

Conclusion:
This completes our 3 thread masterclass on divergence. This an important concept in trading. Even if you don't trade divergence, you should at least know about it to spot the potential change in trend. Keep reading again and again until you master these concepts. All the best!

Also, I am linking here all the threads related to this divergence masterclass(Don't know if that is allowed. Mods please remove the links if it isn't allowed, please don't remove the post). I am also thinking of combining all the threads into a single PDF file, but don't know how I'll share it with everyone since external link sharing is not allowed. Let me know if you guys want it. Cheers!

1. Divergence Masterclass 1 - What is Divergence?

2. Divergence Masterclass 2 - Bullish divergence

3. Divergence Masterclass 3 - Bearish divergence