Divergence Setups Trading XAUUSD Using Divergence Setup

Divergence is one of the trade setups used by XAUUSD traders to analyze prices of Gold and try to predict the next likely direction of these xauusd prices. It involves looking at the Gold price chart and one more indicator. For our example we shall use MACD indicator.

To spot this divergence trading setup find two chart points at which price makes a new swing high or a new swing low but MACD indicator does not, indicating there is a divergence between the price & the momentum.

To search for divergence trading setups we look for two chart points, two highs that form an M-shape on the XAUUSD price chart or two lows that form a W-Shape on the Gold price chart. Then look for the same M-shape or W-Shape on the indicator that you use to trade.

Example of a XAUUSD Price Divergence Setup:

In the XAUUSD chart below we identify two chart points, point A and point B (swing highs). These two chart points form an M-shape on the price chart.

Then using MACD indicator we check the highs made by MACD indicator, these are the highs that are directly below Chart points A & B.

We then plot one line on the Gold chart and another line on the MACD indicator as shown below.

Gold Trading - Divergence Trading Setup - Drawing Divergence Lines

The XAUSUD price chart above shows an example of one of the four types of divergence trading setups, the one above is known as hidden bearish divergence, one of the best types to trade. Different types of divergence trading setups are covered in the next lesson.

How to spot divergence Trading Setup

In order to spot Gold divergence trading signal we check for the following:

HH=Higher High- two highs but the last one is higherLH= Lower High- two highs but the last one is lowerHL=Higher Low- two lows but the last one is higherLL= Lower Low- two lows but the last one is lower

First let us look at the illustrations of these trading terms:

M-shapes dealing with price Highs

W-Shapes dealing with price lows

These concepts above are explained below using XAUUSD price charts & MACD indicator.

Example of M Shapes on Gold Price Charts

Example of W Shapes on XAUUSD Price Charts

Now that you've learned the divergence trading terms that are used to explain the divergence trading setups. Let us look at the two types of divergences & how to trade these setups on XAUUSD price charts.

There two types are of divergence trading setups:

• Classic Divergence Setup
• Hidden Divergence

These two divergence trading setups are explained on the next tutorials.