Divergence Strategy - Hidden Bullish Divergence & Hidden Bearish Divergence Trading
Hidden Divergence Strategy PDF - Hidden Divergence Strategy Guide
Hidden divergence strategy is used as a possible signal for a market trend continuation after the price has retraced. Hidden divergence is a signal that the original trend is resuming. This is the best divergence setup to trade because it is in same direction as that one of the continuing market trend.
Hidden Bullish Divergence - Hidden Divergence Tutorial
Hidden bullish divergence setup happens when price is forming a higher low (HL), but the oscillator (indicator) is showing a lower low (LL). To remember them easily think of them as W-shapes on Chart patterns. Hidden bullish divergence occurs when there's a retracement in an up wards trend.
The example below shows an image of this divergence setup, from the screen shot the price made higher low (HL) but the indicator made a lower low (LL), this displays that there was a divergence trade signal between the currency price & indicator. This trading signal highlights that soon the market uptrend is going to resume. In other terms it displays this was just a retracement in an uptrend.
Divergence strategy
This confirms that a retracement move is exhausted and indicates underlying strength of a uptrend.
Hidden Bearish Divergence
This pattern happens when price is making a lower high ( LH ), but the oscillator is showing a higher high ( HH ). To remember them easily think of them as M shapes on Chart patterns. It occurs when there's a retracement in a downwards trend.
The example below shows an image of this formation, from the image the price made a lower high ( LH ) but the indicator made a higher high ( HH ), this displays that there was a divergence between the price & the indicator. This displays that soon the market downtrend is going to resume. In other terms it displays this was just a retracement in a downwards trend.
Divergence strategy
This confirms that a retracement move is exhausted and indicates underlying strength of a downtrend.
Other popular indicators used are CCI indicator (Commodity Channel Index Indicator), Stochastic Oscillator Indicator, RSI & MACD indicators. MACD & RSI Indicator are the best indicators to use.
NB:Hidden divergence is the best type to trade because it gives a trading signal that's in the same direction with the current market trend, thus it has a high reward to risk ratio. It provides for the best possible entry.
However, one should combine this setup with another technical indicator like the stochastic oscillator or moving average indicator & buy when the currency is oversold, and sell when the currency is overbought.
Combining Hidden Divergence with MA Crossover Strategy
A good indicator to combine these setups is the moving average indicator using MA crossover method. This will create a good strategy.
MA Crossover Strategy - Divergence Strategy
In this divergence strategy, once the signal is given, a trader will then wait for the moving average cross over technique to give a buy/sell signal in the same direction, if there is a bullish divergence set up between the price & indicator, wait for the moving average crossover system to generate an upwards cross over signal, while for a bearish divergence setup wait for the moving average crossover method to give a downward bearish crossover signal.
By combining this Divergence strategy with other indicators this way one will avoid whipsaws when it comes to trading with this divergence signal.
Combining Divergence with Fibonacci Retracement Levels
For this trading example we shall use an upwards market trend. The forex pair is GBPUSD. We shall use MACD.
Because the hidden divergence setup is just a price retracement in an upwards trend we can combine this divergence signal with the most popular retracement tool that is the Fibo retracement areas. The example below highlights that when this divergence pattern appeared on the chart, the price had just hit the 38.20% level. When price tested this point, this would have been a good level to place a buy order on the GBPUSD currency.
Divergence Strategy Setup - Hidden Bullish Divergence Strategy
Combining with Fib Expansion Levels
In the example above once the buy trade was placed, a trader would then need to calculate where to take profit for this trade. To do this a trader would need to use the FX Fib Extension Levels.
The Fib expansion was drawn as shown on the chart below.
Divergence Strategy Setup
For this example there were three take profit levels:
Fibo Expansion Level 61.8% - 131 pips profit
Fibonacci Expansion Level 100.00% - 212 pips profit
Fibo Expansion Level 161.8% - 337 pips profit
From this divergence strategy combined with Fibonacci would have provided a good strategy with a good amount of profit set using these Fibonacci take profit areas.
