Hidden Bullish and Hidden Bearish Divergence Trading

Traders utilize hidden divergence as a potential indicator of a trend's continuation once the stock trading price has undergone a retracement. It serves as a message that the initial, prevailing trend is reasserting itself. This setup is optimal for trading as it aligns with the direction of the ongoing market trend.

Index Hidden Bullish Divergence Setup

This setup happens when stock price is forming a higher low ( HL ), but the oscillator indicator is displaying a lower low (LL). To remember these setups easily think of them as W shapes on Charts. It forms when there's a price retracement in an up-ward trend.

The illustration explained and shown below shows a screen shot 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 highlights that there was a diverging signal between the stock trading price & indicator. This signal shows that soon the stock trading market uptrend is going to resume. In other words it illustrates this was just a retracement in an up-ward trend.

This serves to confirm the completion of a price retracement move and highlights the underlying strength of an upward trend.

Index Trade Hidden Bearish Divergence Trade Setup

This setup happens when stock price is forming a lower high ( LH ), but the oscillator technical 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 image below shows a screenshot of this index setup. From it, the stock hit a lower high. But the indicator reached a higher high. That points to a split between price and tool. The down move in stock trading will pick up soon. Put simply, it marks a pullback in the drop trend.

This confirms the completion of a retracement and reveals the underlying strength of a downward trend.

Other frequently used indicators include CCI (Commodity Channel Index), Stochastic Oscillator, RSI (Relative Strength Index), and MACD (Moving Average Convergence Divergence). Among these, MACD and RSI are considered the most effective technical indicators.

**Note:** The hidden divergence pattern configuration is the most advantageous divergence setup to trade because it generates a trading signal aligned with the primary market trend, thus offering a superior risk-to-reward ratio. This configuration provides the best potential entry point.

An index trader should pair this stock setup with tools like the stochastic oscillator or moving average. Buy when the index looks oversold. Sell when overbought.

Combining Hidden Divergence Pattern with MA Cross-over Strategy Method

A useful technical indicator for integrating these setups is the moving average, utilizing the MA crossover strategy. This will form a solid trading approach.

Moving Average Cross-over Technique

In this method, after the alert appears, hold for a moving average crossover in the same way. Spot a bullish split between price and tool? Wait for its up cross buy sign. See a bearish split? Look for the down cross sell sign.

If you use this stock signal along with other indicators, you can avoid false signals while trading this signal.

Combining Together with Trading Fibonacci Retracement Levels

For this illustration we shall use an upwards market trend. We shall use MACD.

Hidden divergence acts as a pullback in an uptrend, so pair it with Fibonacci retracement levels, a top tool for pullbacks. The charts below show price hitting the 38.20% level during this setup. That level made a good spot to enter a buy position for stocks.

Combining with Trading Fib Expansion Levels

In the stock trading example above, after placing the buy order, figure out the take profit level. Use Fibonacci expansion levels for index trades to do this.

The Fibonacci extension measure was plotted precisely mirroring the configuration seen in the accompanying stock chart illustration below.

For this example there were 3 tp order areas:

Expansion Level 61.80% - 131 pips profit

Expansion Level 100.00% - 212 pips profit

Expansion Level 161.80% - 337 pips profit

This plan, along with the Fibo tool, would make a good strategy with a good profit set using the take profit order levels.

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