Those three words are synonyms, but only one, divergence, is typically used in technical analysis. Perhaps the concept of divergence would prove easier to understand if one of its synonyms were used. Divergence is any disagreement or variance in price and indicator action. Look for bearish divergences at highs and bullish divergences at lows.
It's as easy as that.
Some examples illustrate the concept.
Note: Charts do not reflect current prices.
Annotated Daily Chart of MER:
Simple, right? I might think so, but not all experts agree as to what constitutes divergence. Some would limit bearish divergence to a certain combination of price and oscillator highs and bullish divergence to a certain combination of price and oscillator lows. Others believe, as I do, that any disagreement or variance in price and oscillator highs is bearish divergence and any in price and oscillator lows is bullish divergence.
Think of the oscillator action as representing the push behind a move. Price action is the result of that push. If the oscillator indicates that a bigger push resulted in a lower price high, that's bearish divergence. All that pushing couldn't produce a higher price high, so something was wrong. There was some resistance to going higher, with that resistance likely produced by selling into the rise. The same thing would be true if the push were equal but resulted in a lower price high. If prices reached higher, but the oscillator indicated that there was less push behind the move, then something is wrong then, too. The move isn't supported. Similar arguments can be made for any variance in price action and oscillator action at price lows, too, producing bullish divergences.
Even if determining bearish or bullish divergence proves relatively simple, it's not always a wise idea to act immediately when they appear. Bearish divergence worked beautifully to predict the pullback in MER as seen on the chart above, and bullish divergence worked equally well to predict a bounce in the OEX, but divergences don't always work so quickly or beautifully.
Annotated Daily Chart of the NDX:
Divergences warn traders to prepare their trading plans. They do not promise that a move will occur or that the plan will immediately be put into effect.
Notice divergences, devise or revise your trading plan accordingly, but then wait for price action to confirm. For example, it's possible to draw a trendline on that NDX chart supporting prices from early November through February 27, when that trendline was broken. Bullish traders were alerted to potential weakness when the NDX began producing those bearish divergences. Exits for intermediate-term or long-term long plays might have been placed below that trendline. If that trendline hadn't been violated, bullish traders still would have been alerted to keep their exit plans updated.
Divergences are traditionally found when comparing price action with oscillator action, but I also look for another type of divergence: Keltner-style divergence.
Annotated Daily Chart of INTC:
Divergence isn't difficult to spot, even for the novice technical analyst. I've employed daily charts in this article, but they're just as easy to find on intraday charts, and the same benefits and cautions apply. Whether refining an exit plan or an entry one, use divergences to alert you to be ready, but let price action actually confirm that it's time to put the plan into effect.