Hidden Bullish & Hidden Bearish Divergence Trading
Hidden divergence is used by traders as a possible sign for a trend continuation after the stock trading price has retraced. It's a signal that the original trend is resuming. This is best setup to trade because it's in same direction as that of the continuing market trend.
Indices Hidden Bullish Divergence
This setup happens when stock price is forming a higher low ( HL ), but the oscillator (indicator) is showing a lower low (LL). To remember these setups easily think of them as W shapes on Chart patterns. It forms when there's a price retracement in an up-ward trend.
The example explained & illustrated below shows an image of this indices formation, from the screen-shot the stock price made higher low (HL) but the indicator made a lower low (LL), this displays that there was a diverging signal between the stock trading price and indicator. This signal displays that soon the stock trading market up trend is going to resume. In other words it portrays this was just a retracement in an up-ward trend.
This confirms that a market price retracement move is exhausted & illustrates the underlying strength of an upward trend.
Stock Indices Trading Hidden Bearish Divergence Pattern
This setup happens when stock price is forming a lower high ( LH ), but the oscillator is showing a higher high ( HH ). To remember these setups easily think of them as M shapes on Chart patterns. It forms when there's a retracement in a downward trend.
The example explained & illustrated below shows an image of this indices formation, from the screen-shot the stock trading price made lower high (LH) but the indicator made a higher high (HH), this displays that there was a divergence between the stock trading price & the indicator. This displays that soon the stock trading market down trend is going to resume. In other words it portrays this was just a retracement in a downward trend.
This confirms that a market price retracement move is exhausted and indicates underlying strength of a downward trend.
Other popular technical indicators used are CCI indicator (CCI), Stochastic Oscillator, RSI and MACD. MACD and RSI Indicator are the best indicators.
NB: Hidden divergence pattern is the best type divergence pattern to trade because it gives a signal that's in the same direction with the current market price trend, thus it has a high reward to risk ratio. It provides for best possible entry.
However, a trader should combine this stock trading setup with another indicator like the stochastic oscillator or moving average & buy when indices is oversold, and sell when indices is overbought.
Combining Hidden Divergence Pattern with MA Crossover Strategy Method
A good technical indicator to combine these setups is the moving average indicator using MA cross over technique. This will create a good trading strategy.
Moving Average Crossover Technique
In this method, once the signal is given, a trader will then wait for the moving average cross over technique to give a buy/sell stock signal in the same direction, if there is a bullish divergence set up between the stock price & indicator, wait for the moving average crossover system to give an upwards crossover trading signal, while for a bearish diverging pattern wait for the moving average crossover trading system to give a downward bearish crossover trading signal.
By combining this stock signal with other technical indicators this way one will avoid whip-saws in trading this trade signal.
Combining with Trading Fibo Retracement Levels
For this example we shall use an upwards market trend. We shall use MACD indicator.
Because the hidden divergence setup is just a retracement in an up-ward trend we can combine this stock trading signal with the most popular retracement tool that is the Fib retracement levels. The examples explained below portrays that when this stock trading setup appeared on chart, trading price had just hit 38.20% level. When stock trading price tested this level, this would have been a good level to place a buy trade order.
Combining with Trading Fib Expansion Levels
In the stock trading above example once the buy trade was placed, a trader would then need to calculate where to put the take profit for this trade. To do this one would need to use the Indices Trading Fib Expansion Levels.
The Fibo expansion was drawn as shown on stock chart as illustrated & shown below.
For this example there were 3 take profit areas:
Expansion Level 61.80% - 131 pips profit
Expansion Level 100.00% - 212 pips profit
Expansion Level 161.80% - 337 pips profit
From this strategy combined with Fibo indicator would have provided a good trading strategy with a good amount of profit set using the take profit order levels.
