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 and is used by traders when looking for an area where price could reverse and begin going in the opposite direction. For this reason this xauusd setup is used as a low risk entry method and also as an accurate way of exit out of a trade.
This strategy is a low risk technique to sell near the top or buy near the bottom, this makes the risks on your trades are very small relative 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 point at which to exit a trade. If you already have an open trade that's already profitable, a good way to identify a profit taking level would be the point where you identify this xauusd setup.
There are two 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 forming lower lows ( LL ), but oscillator is making higher lows (HL). The example illustrated & shown below shows a picture of this xauusd setup.
Gold Classic Bullish Divergence Setup
This example uses MACD indicator as a XAUUSD Trading divergence indicator.
From the example 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 indicator. The signal warns of a possible trend reversal.
Classic bullish diverging trade signal warns of a possible change in trend from down to up. This is because even though the price headed lower the volume of sellers that moved the price lower was less as shown by the MACD technical indicator. This demonstrates underlying weakness of the down-wards trend.
Classic bearish Divergence Setup
Classic bearish divergence setup occurs when the price is showing a higher high ( HH ), but the oscillator is lower high (LH). The image below shows an example of the setup.
XAUUSD Classic Bearish Divergence
This example also uses MACD indicator
From the example 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 as shown by the MACD. This demonstrates underlying weakness of the up-wards trend.
In example above, if you as a trader had used divergence 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 whip-saws. That is why it's always good to confirm the diverging trading signals with other indicators such as the RSI, Moving Averages and Stochastic Oscillator.
A good indicator to combine classic diverging setups is the stochastic oscillator and wait for the stochastic lines to move in the direction of the divergence signal so as to confirm the signal.
Another good technical indicator to combine with is the moving average indicator, in this technical indicator a trader should use the Moving Average Crossover System
Examples of MA Crossover Strategy Method Strategy
Once the divergence signal is given, a trader will then wait for the Moving average cross over system to give a signal in the same direction, if there is a classic bullish setup, a trader will wait for the moving average system to give an upwards cross-over signal, while for a bearish classic divergence signal the trader should wait for the Moving average cross over system to give a downwards bearish cross-over 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 diverging 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 market tops and bottoms.
