Caution: Not all bearish (or bullish) divergences will result in a price reversal to below (or above) the mean.
For example, in the chart above, there was a strong negative divergence between price and RSI between 8th Jan and 8th Feb, and between 8th Jan and 21st Feb. But, the price continued to rise, in one case after after a slight fall. Again, between 21st Feb and 13th Mar, there was a clear negative divergence, but price continued to rise after a minor decline. Why? Cases like these are never highlighted by analysts, probably because they are themselves not clear about the underlying mechanism of divergences.
The important point to consider is the probability of a ‘hidden bullish divergence’ developing after each negative divergence. The speed of price and RSI development after a divergence must be closely watched. Note that the hidden divergences are always stronger and have a higher probability of success than the normal divergences. If a hidden bullish divergence develops after a bearish divergence, then there is a very strong probability of the price retracing to new highs, which is what exactly happened on 13th Mar and 14th Apr.
In such cases, it is safe to close the short trade with a small profit near the previous support points and wait for more confirmation of bearishness.
I noticed, after I posted this comment, that several comments have also highlighted the multiple negative divergences between 8th Jan and 14th Apr. Since I have pointed out the underlying reason behind these 'failed' divergences, I am confident that my comments are still in vogue!
Coinlog
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@Kesari-Bath, Yeah nothing works all the times we are going to explain hidden divergence too in future!
Richard0302
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I wouldn't trade off divergence like that alone. For example, the bearish divergence was in place after price made a higher high and RSI made a lower low but the price went up to make another high before falling.You'd have to be pretty nimble to get out with a profit shorting that 2nd high.
Coinlog
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@Richard0302, Thats true, I trade divergence on small time frame but to explain it what it is I have taken a example on bigger time frame.