Bullish & Bearish Divergence XAUUSD Using Software

Divergence trading is one of signals that can be generated when using the stochastic indicator.

Divergence is a signal that a rally or retracement is losing steam and is likely to reverse. It means that last buyers or last sellers are pushing price in one way whereas the majority of other traders have stopped trading in that way & are cautious of a price correction or pull back.

There are Four types of divergences.

Example 1: Classic Bullish Divergence

A Bullish Divergence in stochastic indicator & the price is followed by a rise in price.

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When the price is making new lows the Stochastic indicator isn't moving past its previous lows it is an indication that the down trend is about to reverse & a bullish rally is likely to occur.

In the example above the price set a new low but it was not coupled with a new low in the measure of Stochastic, when price formed a new low then the technical indicator should have followed suit, but the stochastic did not therefore the divergence.

This setup is even stronger because there is combination of a divergence and then followed by a rise above the 20% level. This combines the Overbought & Oversold levels.

Example 2: Classic Bearish Divergence

A Bearish Divergence in stochastic indicator and the price is followed by a drop in price.

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When price is making new highs but the Stochastic is not moving beyond its previous high it is an indication the up trend will reverse and that a bearish divergence will follow.

This setup is even stronger because there is a combination of a divergence set-up with a dip below the over bought 80 level.

Example 3: Hidden Bullish Divergence Setup

This setup signifies a retracement in an upward trend. This is the best type of divergence to trade, because you are not trading a price reversal, but you're trading within the direction of the market trend.

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Even though, the stochastic oscillator made a lower low the price low was higher than the previous low (higher low). This means that even though bears made a reasonable attempt to push price down as indicated by the stochastic, this wasn't reflected on the price, and the price didn't make a new low. This is the best point to buy the instrument, since it is even in an upwards trend there's no need to wait for a confirmation signal, because you're buying in an upwards trend.

Example 4: Hidden Bearish Divergence

This setup signifies a retracement in a downwards trend.

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This is the best type of divergence to trade, because you are not trading a price reversal, but you're trading within the direction of the market trend. This is the best place to sell the instrument, since it is even in a down trend there's no need to wait for a confirmation signal, because you are selling in a downwards trend.