Divergence System - Bullish and Bearish Divergence Trading
Hidden divergence system is used as a possible sign for a market trend continuation after the market price has retraced. It's a signal that the original trend is resuming. This is the best divergence setup to trade because it's in same direction as that of the continuing market trend.
Hidden Bullish Divergence - divergence system
This divergence setup happens when market price is making a higher low ( HL ), but the oscillator trading is showing a lower low ( LL ). To remember these set-ups easily think of the set-ups as W-shapes on Charts. It forms when there a price retracement in an upward trend.
The example below shows an screen shot of this divergence setup, from the screenshot the price made higher low ( HL ) but the trading indicator made a lower low ( LL ), this displays that there was a divergence signal between the currency price and indicator. This signal displays that soon the market up trend is going to resume. In other words it illustrates this was just a retracement in an uptrend.
divergence system
This confirms that a market price retracement move is exhausted and indicates the under-lying momentum of an uptrend.
Hidden Bearish Trade Divergence
This pattern occurs when the price is forming a lower high (LH), but the oscillator technical indicator is displaying a higher high (HH). To remember these setups easily think of these setups as M-shapes on Charts. It forms when there a retracement in a downwards trend.
The example below shows an screen shot of this formation, from the screen-shot the price made lower high (LH) but the trading indicator made a higher high (HH), this displays that there was a divergence pattern between the price & indicator. This displays that soon the market down trend is going to resume. In other words it illustrates this was just a retracement in a downwards trend.
divergence system
This confirms that a market price retracement move is exhausted & indicates the underlying strength of a down-trend.
Other popular trading indicators used are CCI trading indicator (Commodity Channel Index Indicator), Stochastic Oscillator Technical Indicator, RSI and MACD. MACD & RSI Indicator are the best trading indicators.
NB: Hidden divergence setup is the best type divergence to trade because it gives a signal that is in the same direction with the current market trend, thus it has a high reward to risk ratio. It provides for best possible entry.
However, a forex trader should combine this setup with another indicator like the stochastic oscillator or Moving Average & buy when the currency is over-sold, and sell when the currency is overbought.
Combining Hidden Divergence with Moving Average Crossover Strategy
A good indicator to combine these setups is the MA using Moving Average cross-over trading method. This will create a good trade strategy.
MA Crossover Technique - divergence system
In this divergence system, once the signal is given, a forex trader will then wait for the moving average MA crossover trading strategy to give a buy/sell trade signal in the same direction, if there is a bullish divergence set up between the price and indicator, wait for the MA cross over trading strategy to give an upward crossover signal, while for a bearish divergence pattern wait for the MA crossover trading method to give a downward bearish crossover signal.
By combining this divergence system with other indicators this way a trader will avoid whipsaws when it comes to trading with this signal.
Combining with Fibo Retracement Levels
For this example we will use an upwards market trend. The currency pair is GBPUSD. We shall use the MACD.
Because the hidden divergence pattern is just a retracement in an upward trend we can combine the signal with the most popular retracement tool that's the Fib retracement levels. The example below displays that when this set-up appeared on the trading chart, the price had just hit 38.20% level. When price tested this point, this would have been a good level to open a buy order on the GBPUSD currency.
divergence system setup
Combining with Fibo Extension Levels
In the above example once the buy trade was placed, a fx trader would then need to calculate where to set the tp order for this position. To do this a fx trader would need to use the FX Fibo Expansion Levels.
The Fib extension was drawn as illustrated and shown on chart as shown & illustrated below.
divergence system setup
For this example there were 3 take profit areas:
Fib Expansion Level 61.80% - 131 pips profit
Fibo Expansion Level 100.0% - 212 pips profit
Fibonacci Extension Level 161.80% - 337 pips profit
From this divergence system combined with Fibonacci would have provided a good strategy with a good amount of profit set using these take profit levels.
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