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Divergence Indices Trading Strategy

Hidden divergence trading strategy is used as a possible sign for a stock indices market indices trend continuation after the stock indexes price has retraced. It is a signal that the original indices 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 stock indexes 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 Indices trend.


The example explained and illustrated below shows an image of this divergence trading setup, from the screenshot the stock indexes price made a higher low (HL) but the indicator made a lower low (LL), this shows that there was a divergence signal between the stock indexes price and indicator. This signal shows that soon the stock indexes trading market up indices trend is going to resume. In other words it shows this was just a retracement in an upward indices trend.

Indices Trading Hidden Bullish Divergence Example in Indices Trading

Divergence trading strategy


This confirms that a retracement move is complete and indicates underlying strength of an upward indices trend.


Indices Trading Hidden Bearish Divergence


This setup happens when stock indexes 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 Indices trend.


The example explained and illustrated below shows an image of this indices trading setup, from the screenshot the stock indexes price made a lower high (LH) but the indicator made a higher high (HH), this shows that there was a divergence between the stock indexes price and the indicator. This shows that soon the stock indexes trading market down indices trend is going to resume. In other words it shows this was just a retracement in a downward trend.

Indices Trading Hidden Bearish Divergence Example in Indices Trading

Divergence trading strategy



This confirms that a retracement move is complete and indicates underlying strength of a downward indices trend.


Other popular indicators used are CCI indicator (CCI), Stochastic Oscillator, RSI and MACD. MACD and RSI are the best indicators.


NB: Hidden divergence is the best type 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 the best possible entry.


However, a indices trader should combine this stock indexes trading setup with another indicator like the stochastic oscillator or moving average and buy when the stock indexes price is oversold, and sell when the stock indexes price is overbought.


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Combining Hidden Divergence with Moving Average Crossover Strategy

A good indicator to combine these indices trading setups is the moving average indicator using the moving average crossover method. This will create a good trading strategy.

Moving Average Crossover Method

Moving Average Crossover Method - Divergence trading strategy


In this divergence indices trading strategy, once the trading signal is given, a indices trader will then wait for the moving average crossover method to give a buy/sell stock indices signal in the same direction, if there is a bullish divergence setup between the stock indexes price and indicator, wait for the moving average crossover system to give an upward crossover signal, while for a bearish divergence setup wait for the moving average crossover system to give a downward bearish crossover signal.


By combining this Divergence trading strategy with other indicators this way one will avoid whipsaws when it comes to trading with this indices signal.


Combining with Indices Trading Fibonacci Retracement Levels

For this example we shall use an upward market trend. Stock Indices Trading - We shall use the MACD indicator.


Because the hidden divergence is just a retracement in an upward indices trend we can combine this stock indices signal with the most popular retracement tool that is the Fibonacci retracement levels. The example explained and illustrated below shows that when this stock indexes trading setup appeared on the chart, the stock indexes price had just hit the 38.2% level. When stock indexes price tested this level, this would have been a good level to place a buy order.

Indices Trading Hidden Bullish Divergence on Upward Indices Trend Combined With Indices Trading Fibonacci Retracement Levels

Divergence trading strategy setup


Combining with Indices Trading Fibonacci Expansion Levels

In the stock indexes trading example above once the buy indices trade was placed, a indices trader would then need to calculate where to take profit for this trade. To do this one would need to use the Indices Trading Fibonacci Expansion Levels.


The Fibonacci expansion was drawn as shown on the chart as shown below.

Indices Trading Fibonacci Expansion Levels Combined with Indices Trading Hidden Bullish Divergence

Divergence trading strategy setup



For this example there were three take profit levels:

Indices Trading Fibonacci Expansion Level 61.8% - 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 levels.

 

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