Divergence Setups Summary - XAUUSD TRADING
Classic Bearish Divergence - HH price, LH indicator - Indicates underlying weakness of a price trend - Warning of a potential reversal in the trend from upwards to downwards.
Classic Bullish Divergence Trading Setup - LL price, HL indicator - Indicates underlying weakness of a trend - Warning of a possible reversal in the trend from downwards to upwards.
Hidden Bearish Divergence - LH price, HH indicator - Indicates the under-lying power of a trend - Mainly found during corrective rallies in a downward trend.
Hidden Bullish Divergence Setup - HL price, LL indicator - Indicates underlying power of a trend - Occurs mainly during corrective declines in an upwards trend.
Description and Illustration of Divergence Trading Setup Terms:
M-shapes dealing with price highs
M-shapes: Divergence Trading Terms
W shapes dealing with price lows
W-shapes: Divergence Trading Terms
These are the shapes to look for when using divergence trading set-ups.
One of the best indicators for using with this divergence trading setup pattern is MACD Indicator - as a divergence trading signal, MACD divergence setup is a high probability set-up to enter a position. But as with any signal there are certain parameters that have to be looked at to make this signal a high probability setup.
Getting straight in to a position as soon as you as a trader see this setup is not the best strategy to use. This divergence trading setup pattern should be used in combination with another indicator to confirm the market direction of the XAUUSD price trend. A good system to combine this set-up with is the moving average MA crossover trading method.
Be aware this setup on a smaller time frame isn't so significant. When divergence is seen on a 15 minute price chart it may or might not be very crucial as compared to the 4 hour chart time-frame or the 1 day time=frame.
If seen on a 60 minute chart, 4 hour chart, or day chart time frame, then start looking and searching for other factors & aspects to indicate when the price may react to the divergence.
This brings us to a key point and factor when using this trading signal to open a position: on a higher time frame MACD divergence setup can be a fairly reliable technical indicator of a reversal in the price direction. However, the big question is: WHEN? That is why getting straight in to a trade as soon as you see this divergence setup isn't always the best trade strategy.
Many traders get caught out by entering the market too soon when they see MACD divergence setup. In many cases, price has still got some momentum to continue in ruling market trend direction. The trader whose jumped in too soon can only stare at the computer screen in dismay as the market price moves through his stop loss order taking him out.
If you simply look for this divergence trading setup pattern without any other considerations you'll not be aligning yourself with the best chance, so to increase the chance of making a winning trade you should also consider other factors & aspects, specifically other technical indicators.
What other factors & aspects should you as a trader consider when using this divergence trading setup?
1. Support, Resistance and Fib levels on higher time framesAnother way to significantly increase the chances of a winning trade is to look at and observe the higher time-frames before opening a trade order based on the lower time frame.
If you look at and observe the hourly, 4 hour or daily chart has reached a major resistance level, support or Fib level then the probability of a successful trade position based on the divergence setup on a lower time frame at this point increases.
2. Reward to risk ratioAnd finally, when looking for divergence trading set-ups, it is very crucial that you as a trader enter the trade correctly, so that you as a trader have a good risk: reward ratio & only open trades which have more profit potential than what you are risking. If you understand how to enter a position properly, you as a Gold trader can measure your risk : reward ratio before you open a position. That way, you as a gold trader can only select to open orders that offer a favorable risk to reward ratio.
Finally, when used correctly & combined with other technical indicators to confirm this divergence trading signal, divergence trading setup pattern can offer a good trading method for trading Gold metal.
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