Hidden Divergence Trading Strategy: Day Trading Tips

As mentioned in Rule 1, divergence can exist only if there is an ascending slope or descending slope on the price trend or on the indicator. You could use a candlestick pattern or some other kind of entry trigger. It just helps to time when the pullback is over and the market is ready to continue on in the direction of the overall trend. I’ve had good success combining price action techniques and divergence (divergence for setup – price action signals for entry triggers).

For that reason, it’s useful to combine trading strategies because the use of only one indicator cannot capture the whole market context. By using two or three indicators simultaneously, traders may form a more robust strategy to better define a trend and choose more appropriate reactions. Bearish hidden divergence happens when its price action forms progressively lower highs in the presence of progressively higher highs developed by the indicator. Near the bottom end of the downtrend, a hidden bullish divergence can be a powerful trading signal.

hidden divergence

I have been practicing technical analysis and trading Nifty and Bank nifty futures for almost 4 years. I have a deep understanding of technical indicators like RSI, MACD, DIRECTIONAL MOVEMENT INDEX, BOLLINGER BANDS, AVERAGE TRUE RANGE AND STOCHASTICS etc. I am a big believer of the quote from the book one thing, “the path to more is through less”. When prices are making higher low and RSI is making a lower low we have a hidden bullish divergence at place. You can see, RSI hidden bearish divergence is seen when the 50 and 20 EMA are having a negative crossover . Trends do not last forever, and it’s smart to trade divergence as soon as it’s spotted.

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Divergence, as the name suggests forms when the oscillator and the price action fail to converge. When prices makes higher high and RSI makes lower high we have a simple bearish divergence at place. After that, the price broke the lower resistance level but rebounded from the upper one, and continued the downward movement.

A hidden bullish divergence can fail when price fails to break the interim high. Following the formation of the hidden bullish divergence, price tends to break out higher. For divergence to work, you basically need an oscillator.

How to find out hidden bullish divergence on chart?

The divergence signals produced by the MACD usually resemble those produced by the RSI. The image of NVIDIA is an example of bullish fxcc review. But if the indicator we are analyzing the security with makes a lower low, we have “hidden” divergence. As you observe, this was a pretty strong trend upwards, and many regular divergences occurred on the upper side of the Stochastic. By taking only long positions, we filtered many bad trades.

After this divergence, you will most likely see a quick increase in the price. Note that if any of the mentioned conditions do not exist in your chart, then there is no forex capital market divergence. The crucial factor is to recognize the indicator that gets implemented, understand the nuances, and practice using it, before starting to trade with them.

Average true range (ATR)

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Again, this bearish hidden divergence turned out to be the start of a big downward market move. In this example, the indicator does all the hard work and detects these 2 hidden divergences for you. If you’ve been trading for some time, you should already be familiar with regular divergence which many experts consider the best way to trade reversals. I prefer to spot divergence manually, because it’s not that hard once you’re used to doing it and it keeps the chart uncluttered. I’ve never used one with entry, exit and stop loss levels before. I wouldn’t be surprised if something like that exists, though.

After you have identified hidden bearish divergence, you can enter your position when the RSI falls or closes below its previous value. In the above chart, you can see the prices are making higher low and RSI is making lower low. In the below chart, you can see I have plotted two exponential moving average 50 EMA and 20 EMA to determine the trend. When moving averages have a positive crossover we will consider it as an uptrend and when moving average have a negative crossover we will consider it as a downtrend. Regular divergence is especially useful to cautiously predict the end of a trend, while hidden divergence can be used as an indication of trend continuation.

  • If you spot that the indicator has at the same time made a series of lower lows, you have identified hidden divergence.
  • CCI divergences are only useful in conjugation with other indicators or price action.
  • For the sake of this article, we’ll be using candlestick patterns in combination with hidden divergence.
  • Suppose in an uptrend price makes higher lows while oscillator makes lower lows.

Regular/Classic divergence, which happens when the price trend creates higher highs or lower lows while the indicator makes lower highs or higher lows, respectively. Our scanners are faster and easier to use than any competitive program, and integrated perfectly with our Trading Platforms. The MACD indicator shows changes in the strength, direction, momentum, and duration of a trend. Stochastic oscillator, first introduced by George Lane in the 1970s, is part of the momentum indicator family.

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By the way, it’s very, very easy to trade with Hidden Divergence Pro indicator because… I would also, to chat with you about divergence anytime soon. Are we suppose to be connecting the peaks/troughs of MACD LINE or MACD HISTOGRAM to check the divergence/convergence? Try to picture the top of the histogram as a single, unbroken line when it’s above zero, and do the same with the bottom of the histogram when it’s below zero.

hidden divergence

Using this theory, here is an example how you would detect a… The two main types of divergence are regular and hidden divergence. Each type will either have a bullish bias or a bearish bias. Key patterns to look for when attempting to gain insight into potential future price action. Following the interim high that is formed, price action barely tests this high and then drops off.

Bearish Hidden Divergence

It refers to the disagreement between the momentum indicators or oscillators, and the price. Commonly used indicators include relative strength index , stochastics, and moving average convergence/divergence . Of the two types of divergence, the forex trading affirmations represents the higher probability pattern. This is based on the fact that the hidden divergence is a trend continuation indicator. If you’re a trend-following trader, then you should train your eyes to spot hidden divergence on different indicators.

The drawback is that longer time frames result in fewer trades and fewer divergences. Instead, the price may have just entered sideways consolidation after a divergence. A sideways trendor consolidation refers to the horizontal price movement where the price of an asset trades within a stable range.

If you spot that the indicator has at the same time made a series of lower lows, you have identified hidden divergence. In this case, it suggests that the uptrend will continue and you could choose to go long, or buy, the asset. While the regular divergence is easy to spot, hidden divergences are less rare and requires some practice to spot them.

Bollinger bands on MACD

The example that you gave did not have enough up and down movement in price for me to ever consider that a divergence play at all. From the small snapshot you gave, it looked more like the bigging of a possible flag pattern more than any divergence setup. In divergence trading, you obviously don’t know how far or how large divergence will be! If you will add a wide stop loss, then it will hit the risk management. After you have identified hidden bullish divergence, you can enter your position when the RSI rises or closes above its previous value. The steeper the slope, the higher the likelihood of a price reversal or chance to earn profits.

The line at which the hidden divergence was confirmed on the 30-minute chart. If the price of an asset makes a series of lower highs, this can indicate that a downtrend is underway. If the price of an asset makes a series of higher lows, this can denote an uptrend is underway. Common indicators to use are the stochastic indicator, the MACD and the OsMA. However, almost all indicators can be used to find divergence. Throughout this lesson, we will show you different examples using different indicators.

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