How Do I Trade Classic Bullish Divergence & Bearish Divergence
In Bitcoin trading, classic divergence setup is used as a possible sign for a price trend reversal and it is used by BTCUSD traders when looking for an area where the price could reverse and start going in the opposite direction. For this reason this classic divergence setup is used as a low risk entry method & also as an accurate way of exiting out of an open BTC USD Crypto trade.
This classic divergence strategy is a low risk technique to sell near the top or buy near the bottom, this makes the risk in your trades/transactions very small relative to potential reward. However, this is one method with very many whipsaw signals & most traders do not recommend using it.
Classic divergence setup in Bitcoin Crypto Currency trading is also used to predict the optimum point at which to exit an open trade. If you already have an open trade that is already profitable, a good way to identify a profit booking level would be the point where you identify this divergence trade setup.
There are 2 types of classic divergence - based on the direction of the Bitcoin price trend:
- Classic Bullish BTCUSD Trading Divergence
- Classic Bearish Divergence Trade Setup
Classic Bullish Bitcoin Trade Divergence
Classic bullish divergence trading setup pattern occurs when the price is making lower lows (LL), but the indicator is making higher lows (HL). The example put on display below shows picture of this classic divergence set-up.
Classic Bullish Divergence Trading Setup - BTCUSD Chart
The example above uses MACD as a divergence trading indicator.
From the above example the price made a lower low (LL) but the indicator made a higher low (HL), this highlights there is a divergence setup between the BTCUSD price and the indicator. This signal warns of a possible market trend direction reversal.
Classic bullish divergence signal warns of a possible change in the Bitcoin price trend from downwards to upward. This is because though the price moved lower the volume of sellers that moved price lower was less than before when you compare the 2 lows - as illustrated by the MACD technical indicator.
This shows under-lying weakness of the downward Bitcoin price trend.
Classic Bearish Divergence
Classic bearish divergence trading pattern setup occurs when price is making a higher high (HH), but the oscillator trading is making a lower high (LH). The example put on display below shows this of the classic bearish divergence setup.
Classic Bearish Divergence Setup - BTCUSD Chart
The above example also uses MACD indicator
From the above example the price made a higher high (HH) but the trading indicator made a lower high (LH), this highlights there is a divergence setup between the BTC/USD Crypto price & indicator. This signal warns of a possible market trend direction reversal.
Classic bearish divergence signal warns of a possible shift in the Bitcoin price trend from upwards to downwards. This is because though the price moved higher the volume of buyers that moved price higher was less as highlighted by the MACD.
This indicates under-lying weakness of the upward Bitcoin price trend.
In the examples set-out above, if you had used classic divergence setups to trade you would have gotten good signals to enter or exit the trades at an optimal point. However, divergence signals just like other indicators is also prone to whipsaws. That is why it's always good to confirm the divergence signals with other indicators such as RSI, Moving Averages & Stochastic Oscillator before opening a Bitcoin trade.
A good indicator to combine classic divergence setup is the stochastic oscillator and wait for the stochastic indicator lines to move in the direction of the divergence signal so as to confirm the signal generated by this trade setup.
Another good technical indicator to combine with this setup is the moving average indicator, in this indicator a btc usd trader should use the Moving Average Cross-over System to confirm the trade signal generated by the divergence setup.
Example illustration of MA Crossover Strategy
MA Crossover Trading Method Combined with Classic Divergence Trading Setup
Once the divergence signal is generated, a trader will then wait for the MA crossover method to give a signal in the same market direction, if there is a classic bullish divergence trading signal, a trader will wait for the MA cross over method to give an upward crossover signal, while for a bearish classic divergence signal the trader should wait for the Moving Average cross over system to give a downward bearish cross over.
By combining the classic divergence signals with other indicators this way, a trader will be able to avoid whipsaws when it comes to trading the classic divergence signals, because the trader will wait til the market has actually reversed & is already moving towards the generated signal direction - hence the trader will not fall into the trap of picking market tops and market bottoms by entering transactions before the actual divergence setup has been confirmed.
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