Hidden Bullish and Stocks Hidden Bearish Divergence Stocks

Hidden divergence is used as a possible sign for a stocks trend continuation after the price has retraced. It is a signal that the original stocks trend is resuming. This is the best setup to trade because it is in the same direction as that of the continuing market trend.

Stock Hidden Bullish Divergence

This setup happens when price is making 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. It occurs when there is a retracement in an upward stock trend.

The example illustrated and explained below shows an image of this stocks setup, from the screenshot the stocks price made a higher low (HL) but the indicator made a lower low (LL), this shows that there was a diverging signal between the stocks price and indicator. This signal shows that soon the stocks market up stocks trend is going to resume. In other words it shows this was just a retracement in an upward stocks trend.

This confirms that a retracement move is complete and indicates underlying strength of an upward stock trend.

Stocks Hidden Bearish Divergence

This setup 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 is a retracement in a downward trend.

The example illustrated and explained below shows an image of this stocks setup, from the screenshot the stocks price made a lower high (LH) but the indicator made a higher high (HH), this shows that there was a divergence between the stocks price and the indicator. This shows that soon the stocks market down stocks trend is going to resume. In other words it shows this was just a retracement in a downward trend.

This confirms that a retracement move is complete and indicates underlying strength of a downward stock trend.

Other popular indicators used are CCI indicator (CCI), Stochastic Oscillator, RSI and MACD. MACD and RSI are the best indicators.

NB: Hidden divergence is the best type to trade because it gives a signal that is 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, a stocks trader should combine this stocks setup with another indicator like the stochastic oscillator or moving average and buy when the stocks instrument is oversold, and sell when the stocks instrument is overbought.

Combining Hidden Divergence with Moving Average Crossover Method

A good indicator to combine these stocks setups is the moving average indicator using the moving average crossover method. This will create a good trading strategy.

Moving Average Crossover Method

In this strategy, once the signal is given, a stocks trader will then wait for the moving average crossover method to give a buy/sell signal in the same direction, if there is a bullish divergence setup between the stocks price and indicator, wait for the moving average crossover system to give an upward crossover signal, while for a bearish diverging setup wait for the moving average crossover system to give a downward bearish crossover signal.

By combining this stocks signal with other indicators this way one will avoid whipsaws when it comes to trading this stocks signal.

Combining with Stock Fibonacci Retracement Levels

For this example we shall use an upward market trend. We shall use the MACD indicator.

Because the hidden divergence is just a retracement in an upward stocks trend we can combine this stocks signal with the most popular retracement tool that is the Fibonacci retracement levels. The example illustrated and explained below shows that when this stocks setup appeared on the chart, the stocks price had just hit the 38.2% level. When stocks price tested this level, this would have been a good level to place a buy order.

Combining with Stocks Fib Expansion Levels

In the stocks example above once the buy stocks trade was placed, a stocks trader would then need to calculate where to take profit for this trade. To do this one would need to use the Stocks Fib Expansion Levels.

The Fibonacci expansion was drawn as shown on the chart as shown below.

For this example there were three take profit levels:

Expansion Level 61.8% - 131 pips profit

Expansion Level 100.0% - 212 pips profit

Expansion Level 161.8% - 337 pips profit

From this strategy combined with Fibonacci would have provided a good strategy with a good amount of profit set using these take profit levels.