DIVERGENCE TRADING SETUPS SUMMARY

Classic Bearish - HH gold price, LH indicator - Indicates underlying weakness of a xauusd trend - Warning of a possible change in the xauusd trend from up to down.

Classic Bullish - LL gold price, HL indicator - Indicates underlying weakness of a xauusd trend - Warning of a possible change in the xauusd trend from down to up.

Hidden Bearish - LH gold price, HH indicator - Indicates underlying strength of a xauusd trend - Mainly found during corrective rallies in a downward gold trend.

Hidden Bullish - HL gold price, LL indicator - Indicates underlying strength of a xauusd trend - Occurs mainly during corrective declines in an upward gold trend.

Illustrations of the divergence terms:

M-shapes dealing with gold price highs

M-shapes

W-shapes dealing with gold price lows

W-shapes

These are the shapes to look for when looking for when using these xauusd setups.

One of the best indicator for this xauusd setup is the MACD XAUUSD Indicator - as a xauusd signal MACD divergence is a setup to enter a trade. But as with any signal there are certain precautions that have to be observed to make this xauusd signal a setup. Getting straight in to a trade as soon as you see this xauusd setup is not the best strategy. This setup should be used in combination with another technical indicator to confirm the direction of the gold trend. A good system to combine with is the moving average crossover system.

Be aware this xauusd setup on a smaller time frame is not so significant. When divergence is seen on a 15 minute chart it may or may not be very important as compared to the 4 hour chart timeframe on MetaTrader 4 platform.

If seen on a 60 minute chart, 4 hour chart, or daily chart timeframe, then start looking for other factors to indicate when the gold price may react to the divergence.

This brings us to a key point when using this xauusd signal to enter a trade: on a higher time frame MACD divergence can be a fairly reliable indicator of a change in gold price direction. However, the big question is: WHEN? That is why getting straight in to a trade as soon as you see this xauusd setup is not always the best strategy.

Many investors get caught out by entering the xauusd market too soon when they see MACD divergence. In many cases, gold price has still got some momentum to continue in the current direction. The investor who has jumped in too soon can only stare at the screen in dismay as gold price shoots through his stop loss taking him out.

If you simply look for this xauusd setup without any other considerations you will not be aligning yourself with the best odds, so to increase the odds of making a successful trade you should also look at other factors, specifically other indicators.

What other factors should you consider when using this xauusd setup?

1. Support, Resistance and Fibonacci levels on higher time frames

Another way to greatly increase the odds of a winning trade is to observe the higher chart timeframes before opening an order based on the lower time frames.

If you observe that the hourly, 4 hour or daily XAUUSD Trading chart has met a major resistance, support or Fibonacci level then the probability of a successful trade based on divergence on a lower time frame at this point increases.

2. Reward to risk ratio

And finally, when looking for divergence, it is very important that you enter the trade correctly, so that you have a good risk/reward ratio and only open xauusd transactions that have more profit potential than what you are risking. If you understand how to enter a transaction properly, you can measure your risk/reward before you open a transaction. That way, you can only choose to open orders that offer a favorable ratio.

Finally, when used correctly and combined with other technical indicators to confirm this xauusd signal, divergence setup can offer huge profit potential.