Divergence Strategy
Hidden divergence trading strategy is used as a possible sign for a oil market oil trend continuation after the crude oil price has retraced. It is a trading signal that the original oil trend is resuming. This is the best divergence trading setup to trade because it is in the same direction as that of the continuing market trend.
Divergence trading strategy
This divergence trading setup happens when crude oil price is making a higher low ( HL ), but the oscillator (indicator) is showing a lower low (LL). To remember them easily think of them as W-shapes on Chart patterns. It occurs when there is a retracement in an upward Oil Trading trend.
The example explained below shows an image of this divergence trading set up, from the screenshot the crude oil price made a higher low (HL) but the indicator made a lower low (LL), this shows that there was a divergence signal between the crude oil price and indicator. This signal shows that soon the crude oil market up oil trend is going to resume. In other words it shows this was just a retracement in an upwards oil trend.
Divergence trading strategy
This confirms that a retracement move is complete & indicates underlying strength of an upwards oil trend.
Crude Oil Trading Hidden Bearish Divergence
This setup happens when crude oil price is making a lower high ( LH ), but the oscillator is showing a higher high (HH). To remember them easily think of them as M-shapes on Chart patterns. It occurs when there is a retracement in a downward Oil Trading trend.
The example explained below shows an image of this oil setup, from the screenshot the crude oil price made a lower high (LH) but the indicator made a higher high (HH), this shows that there was a divergence between the crude oil price and indicator. This shows that soon the crude oil market down oil trend is going to resume. In other words it shows this was just a retracement in a downward trend.
Divergence trading strategy
This confirms that a retracement move is complete & indicates underlying strength of a downward oil trend.
Other popular technical indicators used are Commodities Channel Index technical indicator (CCI), Stochastic Oscillator, RSI and MACD. MACD & RSI are the best indicators.
NB: Hidden divergence is the best type to trade because it gives a signal that's in the same direction with the current market trend, thus it has a high reward to risk ratio. It provides for the best possible entry.
However, a trader should combine this crude oil trading setup with another indicator like the stochastic oscillator or moving average and buy when the crude oil price is oversold, and sell when the crude oil price is overbought.
Combining Hidden Oil Divergence with Moving Average Crude Oil Trading Crossover Strategy
A good indicator to combine these oil trading set ups is the moving average indicator using the moving average cross-over method. This will create a good trading strategy.
Moving Average Crossover Method - Divergence trading strategy
In this divergence oil trading strategy, once the trading signal is given, a trader will then wait for the moving average cross over method to give a buy/sell oil trading signal in same direction, if there's a bullish divergence setup between the crude oil price and indicator, wait for the moving average crossover system to give an upwards cross over signal, while for a bearish divergence set-up wait for the moving average crossover system to give a downward bearish crossover signal.
By combining this Divergence strategy with other indicators this way a trader will avoid whipsaws when it comes to trading with this oil trade signal.
Combining with Oil Trading Fib Retracement Levels
For this example we shall use an upward market trend. Oil Trading - We shall use the MACD indicator.
Because the hidden divergence is just a retracement in an upward oil trend we can combine this oil signal with most popular retracement tool that is the Fibonacci retracement levels. The example explained below shows that when this crude oil trading setup appeared on the chart, crude oil price had just hit the 38.2% level. When crude oil price tested this level, this would have been a good level to set a buy order.
Divergence trading strategy setup
Combining with Oil Trading Fib Expansion Levels
In the crude oil trading example above once the buy oil trade was placed, a trader would then need to calculate where to set take profit for this trade. To do this a trader would need to use the Oil Trading Fib Expansion Levels.
The Fibo expansion was drawn as shown and illustrated on the chart as shown below.
Divergence trading strategy setup
For this example there were 3 take profit levels:
Oil Fibonacci Expansion Level 61.80% - 131 pips profit
Fibonacci Expansion Level 100.0% - 212 pips profit
Fibonacci Expansion Level 161.8% - 337 pips profit
From this divergence trading strategy combined with Fibonacci would have provided a good trading strategy with a good amount of profit set using these take profit areas.
