How to Trade XAUUSD Classic Bullish Divergence and Bearish Divergence
In xauusd trading, classic divergence is used as a possible signal for a trend reversal & is used by traders when looking and searching for an area where price could reverse and begin and start going in the opposite trend direction. For this reason this xauusd setup is used as a low risk entry method and also as an accurate way to exit of a position.
This strategy is a low risk trading technique to sell near the top or buy near the bottom, this makes the risks on your trades are very small in relation to the potential reward. However, this is one technique with very many whipsaws & most traders don't recommend using it.
Divergence in Trading is also used to predict the optimum ideal point/level at which to exit an open trade position. If you already have an open position that's already profitable, a good way to identify a profit taking and booking level would be the point where you identify this xauusd setup.
There are 2 types, based on the direction of the trend:
- Classic Bullish divergence
- Classic Bearish divergence
XAUUSD Classic Bullish Divergence
Classic bullish divergence forms when the price is making/forming lower lows ( LL ), but oscillator technical is forming/making higher lows (HL). The example illustrated & shown below shows picture of this xauusd setup.
Gold Classic Bullish Divergence Setup
This example uses MACD as a XAUUSD Trading divergence indicator.
From the illustration revealed above the price made a lower low(LL) but the indicator made a higher low(HL), this displays there is a divergence between the price and the technical indicator. The signal warns of a possible trend reversal.
Classic bullish diverging trade signal warns of a possible change in trend from downward to upward. This is because even though the price headed lower the volume of sellers that moved the price lower was less as displayed and illustrated by the MACD technical indicator. This demonstrates under-lying weakness of the downwards trend.
Classic bearish Divergence Setup
Classic bearish divergence trade setup occurs when the price is showing a higher high ( HH ), but the oscillator technical is lower high (LH). The image below illustrates and shows an exemplification of the setup.
XAUUSD Classic Bearish Divergence
This example also uses MACD indicator
From the illustration above the price made a higher high(HH) but the indicator made a Lower High(LH), this displays there is a divergence between the price & the indicator. The signal warns of a possible trend reversal.
Classic bearish diverging signal warns of a possible change in the market trend from up to down. This is because even though the price headed higher the volume of buyers that moved the price higher was less just as is displayed and illustrated by the MACD. This demonstrates under-lying weakness of the upwards trend.
In example illustration above, if you as a trader had used divergence to trade you would have gotten good signals to enter or exit the transactions at an optimal point. However, divergence signals just like other indicators, is also prone to whip-saws. That is why it's always good to confirm the divergence signals with other indicators such as RSI, Moving Averages & Stochastic Oscillator Indicator.
A good indicator to combine classic diverging setups is the stochastic oscillator and wait out for the stochastic oscillator indicator lines to move in the direction of the divergence signal so as to confirm the signal.
Another good indicator to combine with is the moving average Moving Average MA trading indicator, in this indicator a gold trader should use the Moving Average Cross-over System
Examples of MA Cross-over Strategy Strategy
Once the divergence setup is given, a trader will then wait for the Moving Average cross over system to give a trading signal in the same direction, if there is a classic bullish setup, one will wait out for the moving average system to give an upwards cross-over signal, while for a bearish classic divergence signal the trader should wait out for the Moving Average cross over system to give a downwards bearish crossover signal.
By combining the classic divergence signals with other indicators this way, a trader will be able to avoid fake outs when it comes to trading the classic divergence signals, because the trader will wait til the market has actually reversed & is already moving towards this direction, hence the trader will not fall into the trap of picking the market tops & bottoms.
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