Hidden divergent forex

A solid longer term trading approach. What is Hidden Divergence? Here is a comparison of the difference between Regular and Hidden Divergence. Regular Divergence Indicates a Potential REVERSAL "Regular divergence is the classic interpretation of divergence that occurs when the price action makes higher highs or lower lows while the oscillating indicator does not. This indicates an early warning that the trend could be coming to an end in the near future.

Chartists typically use other patterns to confirm the actual reversal. This often tends to occur within an existing trend and usually indicates that there is still strength in the prevailing trend and that the trend will resume. In other words, hidden divergence is akin to a continuation pattern. As with regular divergence, hidden divergence can be bullish or bearish. If price makes a higher low, we are trending upward.

Equal-length upswings mean the momentum remains the same. Price swings are not always easy to evaluate with the naked eye because the price can be choppy. Momentum indicators are commonly used to smooth out the price action and give a clearer picture. They allow the trader to compare the indicator swings to price swings, rather than having to compare price to price.

Momentum Indicators Common momentum indicators for measuring price movements include the relative strength index RSI , stochastics, and rate of change ROC. The default setting for RSI is RSI has fixed boundaries with values ranging from 0 to For each upswing in price, there is a similar upswing in RSI. When price swings down, RSI also swings down. Figure 2: Indicator swings generally follow the direction of price swings A.

Trendlines can be drawn on swing highs B and lows C to compare the momentum between price and the indicator. Source: TDAmeritrade Strategy Desk The study of momentum simply checks whether price and the indicator agree or disagree. Figure 3: Compare price and indicator to make better trading decisions. Source: TDAmeritrade Strategy Desk Momentum Divergence Disagreement between the indicator and price is called divergence, and it can have significant implications for trade management.

For this article, the discussion is limited to the basic forms of divergence. It is important to note there must be price swings of sufficient strength to make momentum analysis valid. Therefore, momentum is useful in active trends, but it is not useful in range conditions in which price swings are limited and variable, as shown in Figure 4.

Figure 4: In range conditions, the indicator does not add to what we see from price alone. Variable pivot highs and lows show range. Source: TDAmeritrade Strategy Desk Divergence in an uptrend occurs when price makes a higher high but the indicator does not. In a downtrend, divergence occurs when price makes a lower low, but the indicator does not. When divergence is spotted, there is a higher probability of a price retracement. Figure 5 is an example of divergence and not a reversal, but a change of trend direction to sideways.

Figure 5: Momentum divergence and a pullback. Higher pivot highs small orange arrows signal price support. Source: TDAmeritrade Strategy Desk Divergence helps the trader recognize and react appropriately to a change in price action. It tells us something is changing and the trader must make a decision, such as tighten the stop-loss or take profit.

Seeing divergence increases profitability by alerting the trader to protect profits. Technical traders generally use divergence when the price moves in the opposite direction of a technical indicator. The chart in Figure 6 below shows trends do not reverse quickly, or even often.

Therefore, we make the best profits when we understand trend momentum and use it for the right strategy at the right time. Figure 6: Trend continuation. Agreement between price and the indicator give an entry small green arrows. In Figure 5, taking profit or selling a call option were fine strategies.

The divergence between the price and the indicator lead to a pullback, then the trend continued. If you look at the pivot the price makes below the lower trendline, this is often referred to as a bear trap, where the false signal draws in shorts and price quickly reverses.

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Then we want to wait for the market to form a Higher Low. Then wait for the market to close above the 20 EMA. Once it closes above the 20 EMA, that is our signal to go Long. For each of the trade, I will walk you through what I see on the charts… My thought process on entering into the trade… And how the trades eventually turned out.

This chart above is a trading example of a Hidden Bullish Divergence in an uptrend. From the left-hand side of the chart, you can see that the market just transitioned from a downtrend into an uptrend. The market then finally did a pullback to below the 20 EMA. That is my signal to go Long. This gave me a Stop Loss distance of 15 pips. The market then started to consolidate for a little bit before going up to hit my Take Profit level at As you can see, the market continued to go up after that.

So why not place my Take Profit level at 3R or even 4R? Ultimately, it comes down to your trading style and testing to see which works best for you. This chart above is a trading example of a Hidden Bullish Divergence in a downtrend. In this chart, you can see that the market has transitioned from an uptrend into a downtrend as the 20 EMA crosses below the 50 EMA. As the market traded lower, it formed a Higher Low.

This is my signal to go Long. This gave me a Stop Loss distance of 25 pips. My Take Profit level is then placed at 2R, which is 50 pips above my entry at After I got filled, the market immediately reversed and went up to hit my Take Profit level at 2R.

I had initially planned to place my Buy Limit Order at Had I placed my order at But this time, it just filled me before heading back up. The market then did a pullback to below the 20 EMA. However, it did not form a Higher Low. Instead, it went down to the same level as the previous swing low. At that point, the Stochastic Oscillator is already clearly showing a Lower Low.

The market then closed above the 20 EMA. This indicated to me that the 50 EMA was holding up as a dynamic resistance level. Furthermore, it bounced off the support level at the previous swing low and the Stochastic Oscillator was showing a very distinct Lower Low. So, I decided to give this trade a go. Since the market closed at 0. I then placed my Take Profit level at 2R, which is at 0.

So should I have taken this trade? So as you can see, following the rules is very important. Conclusion Now that you know what the Hidden Bullish Divergence is and how to trade it… Go open your charts now and see if you can spot them and trade them.

Start off with either a demo account or a small live trading account trading only 1 Micro Lot 0. Once you are consistently profitable trading it, then you can start to gradually increase your trading size over time.

Let me know in the comments below. However, a Hidden Bearish Divergence can also occur when the market is in an uptrend. And it occurs when the market forms a Lower Low in a downtrend, but the Stochastic Oscillator is showing a Higher High. In the diagram above, you can see that the market is in an uptrend forming a High High and Higher Low.

This is also a Hidden Bearish Divergence. Though this occurrence is rare, when it occurs it can be a high probability trade. One in a downtrend, and the other in an uptrend. The two EMAs will help set the trading criteria. Then we want the market to close back below the 20 EMA. To go Short, either enter at the close of the candlestick bar below the 20 EMA, or place a Sell Limit Order above the close for a better entry.

Once the market reaches close to our Take Profit level, move the Stop Loss to breakeven. Then we want to wait for the market to form a Lower High. Then wait for the market to close below the 20 EMA. Once it closes above the 20 EMA, that is our signal to go Short. For each of the trade, I will walk you through what I see on the charts… My thought process on entering into the trade… And how the trades eventually turned out.

The market is in a clear downtrend from the left-hand side. The market then did its first pullback to the 20 EMA, touched it, then went back down again. It then did a second pullback to the 20 EMA and this time closed above it. This was my signal to go Short. Since the close was very near to the 1. I then placed my Stop Loss at 1. This is how it looked like on the chart: This was the outcome of the trade: Right after I got Short, the market started to consolidate and go sideways for a while.

This was a positive sign to me because it shows the 20 EMA has held up as a dynamic resistance level. Shortly after, the market tanked and hit my Take Profit level at 1. From the left-hand side of the chart, you can see that the market has been in an uptrend.

The market then dipped below both the EMAs and then came back up above them again. This is also a good indication for me as I was planning to go Short. The market then came back down below both the EMAs and closed below it. This formed the Lower High. The market closed slightly below Then I placed my Take Profit level at 2R which is 60 pips away from my entry level at This was how it looked like on the charts: This is how the trade turned out: As you can see, after I got filled, the market started to tank immediately.

It even went past my Take Profit level by quite a bit. So as a trader, you want to be disciplined. You only take what you have planned to take, and rinse and repeat your trading setup. From the left-hand side of the chart, the market is in a downtrend. The market then did the first pullback to the 20 EMA, closed above it and then below it again in the next bar.

Since the close was around 1. I then placed my Take Profit level at 1. This is how it looked like on the chart: This was how the trade turned out: After placing my Sell Limit Order, I got filled two bars later.