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Divergences Strategy: Plain English Edition

1. What Does This Strategy Do?​

Today we're talking about Divergences — a trading strategy with an intimidating name but a surprisingly simple principle: catching moments when "price deceives you."

What does "price deceives you" mean? Example: a coin keeps rising, rising, rising... but its "momentum" is actually shrinking. Like someone still running forward but obviously running out of steam — they'll stop soon. That's when we prepare to go short.

Conversely: price keeps falling but downward momentum is getting weaker — a bounce is coming. That's when we prepare to bottom-fish.

This strategy uses computer programs to automatically spot these "momentum changed" moments and catch reversal opportunities for us!

2. What the Heck IS Divergence?​

Picture someone climbing stairs:

  • Normal: Climb one floor, get tired; climb another, get more tired. Effort and height are "in sync."
  • Divergence: Still climbing but getting easier, or getting more tired but still climbing. Effort and performance are "not in sync."

In crypto terms:

  • Normal uptrend: Price rises + RSI rises = momentum sufficient, will keep rising
  • Diverging uptrend: Price still rising + RSI no longer rising = momentum weakening, might fall

When price makes a new low but RSI doesn't make a new low, sellers' momentum is exhausted. Buyers might counterattack. That's our entry signal!

3. How Does the Strategy Work?​

Step 1: Watch Price Patterns​

The strategy uses 5 candles to identify where the "bottom" is.

Bullish Pattern (finding bottom):

      - 
  - -   - -
  4 3 2 1 0

Candle position 2 is the lowest point — lower than both sides, and the earlier candle (4) is higher than this bottom. Price fell and bounced.

Step 2: Check RSI​

RSI is like a fitness meter (0-100):

  • Above 70: too overheated, might drop
  • Below 30: too oversold, might bounce

Strategy uses threshold of 40 (slightly more relaxed than 30) to catch more opportunities.

Buy: RSI ≤ 40 AND bullish pattern = open long!

Step 3: When to Sell?​

Sell condition is simple: see bearish pattern, sell.

But with protection: only sell when profitable! If still losing money, even seeing bearish pattern won't sell. Why? Because it's heartbreaking to sell at a loss!

4. Stoploss: Three Lines of Defense​

First Line: Fixed Stoploss at 10%​

Loss reaches 10% → auto-sell and admit defeat. This is relatively generous in crypto, giving price room to fluctuate.

Second Line: Trailing Stop​

This is the strategy's essence! The stop level follows profits upward but never downward.

Example:

  • Buy at $100
  • Price rises to $120 (20% profit) → trailing stop activates!
  • Price climbs to $150 → stop moves to $142.5
  • Price climbs to $200 → stop moves to $190
  • Price drops to $190 → triggered, sell, locks in 90% profit!

Without trailing stop, price climbs to $200 then drops to $90, you'd make nothing.

Third Line: Profit Protection​

sell_profit_only = True — only sell when profitable. Prevents getting shaken out by small fluctuations at a loss.

5. What Markets Suit This?​

Best for: Ranging markets Price bouncing up and down without a clear trend. Divergence strategy is most effective here — buy at bottoms, sell at tops, eat the swings.

Not good for: One-directional暴涨暴跌 (extreme spikes/crashes) Like a coin jumping 50% in one day — momentum too strong, divergence signals fail.

Best scenarios:

  • Major coins (BTC, ETH)
  • 1-hour timeframe
  • Moderate volatility, not extreme markets

6. What Indicators Does It Use?​

Core: RSI (most important!), MACD (auxiliary) Auxiliary: Bollinger Bands, EMA (7 of them!), CCI, SAR

The strategy's buy/sell signals mainly rely on RSI and price patterns — everything else is "for reference only."

7. Summary​

Divergences is a simple but effective trend reversal strategy. It uses the most classic divergence principle — when price action and momentum indicator are inconsistent, a reversal often follows — to catch trading opportunities.

Core logic in three sentences:

  1. Price makes new low but RSI doesn't = buy
  2. Price makes new high but RSI doesn't = sell
  3. Use trailing stop to protect profits

Best for: People with some technical analysis foundation, who want to profit from ranging markets and trend turning points, who don't want to chase momentum or catch falling knives.

Caution: Don't use in one-directional extreme markets. Backtesting and paper trading required. Start with small positions, scale up gradually. Keep learning and improving.

This strategy's greatest value: it implements decades-old classic theory in code, so you don't need to watch charts all day — the computer finds opportunities for you automatically!

Plain English disclaimer: This document explains the Divergences strategy in simple terms. For learning reference only, not investment advice. Trading involves risk — invest carefully!