Trade Gold Trading

How Do You Trade Classic Bullish Divergence and Bearish Divergence

In XAU/USD trading, classic divergence setup is used as a possible sign for a price trend reversal & it is used by XAU USD traders when searching for an area where the price could reverse & start moving in the opposite market trend direction. For this reason this classic divergence trading setup is used as a low risk entry method/technique and also as an accurate way of exiting out of an opened XAUUSD trade.

This classic divergence strategy is a low risk method to sell near the top or buy near the bottom, this makes the risk on your trades very small relative to the potential reward. However, this is one method with very many whipsaw fakeouts & most traders don't recommend using it.

Classic divergence trading setup in XAUUSD Gold trading also is used to predict the optimum point/level at which to exit an opened trade transaction. If you already have an executed position that is already profitable, a good way to identify a profit taking level would be the point where you spot this divergence trading setup.

There are 2 types of classic divergence - based on the direction of the Gold price trend:

  1. Classic Bullish Divergence Trading Setup
  2. Classic Bearish Divergence Setup

Classic Bullish Divergence

Classic bullish divergence trading setup forms when the price is making/forming lower lows (LL), but the indicator is making/forming higher lows (HL). The example below shows picture of this classic divergence set-up.

How to Trade the Classic Bullish Gold Trading Divergence on Gold Charts Explained

Classic Bullish Divergence Trading Setup - Gold Chart

The example above uses MACD indicator as the divergence trading indicator.

From the above example the price made a lower low (LL) but the indicator made a higher low (HL), this shows there's a divergence setup between the XAUUSD price and the indicator. This signal warns of a possible market trend direction reversal.

Classic bullish divergence trading signal warns of a possible change in the XAUUSD price trend from downward to upwards. This is because though the price headed higher lower the volume of sellers which moved price lower was less than before when you compare and analyze the 2 lows - like is shown by the MACD technical indicator.

This shows underlying weakness of the downwards XAUUSD trend.

Classic Bearish Divergence

Classic bearish divergence trading setup occurs when price is making a higher high (HH), but the oscillator technical indicator is making/forming a lower high (LH). The example below illustrates this setup of the classic bearish divergence trading setup.

How to Trade the Classic Bearish Gold Trading Divergence on Gold Charts Explained - Classic Bearish XAUUSD Divergence

Classic Bearish Divergence Trading Setup - Gold Chart

The above example also uses MACD indicator

From the above example the price made a higher high (HH) but the trading indicator made a lower high (LH), this shows there's a divergence setup between the XAUUSD price and the indicator. This signal warns of a possible market trend direction reversal.

Classic bearish divergence trading signal warns of a possible change in the Gold price trend from upward to downwards. This is because even though price moved higher higher the volume of buyers(bulls) that moved price higher was less just as is illustrated by MACD.

This shows the under-lying weakness of the upwards XAUUSD market trend.

In the examples exhibited above, if you had used classic divergence trading set-ups to trade you'd have gotten good signals to enter or exit the trades at an optimal point. However, divergence trading signals just like other indicators is also prone to whipsaw fakeouts. That is why it's always good to confirm the divergence trading signals with other indicators like RSI, MAs Moving Averages & Stochastic Oscillator Technical before opening a trade position.

A good indicator to combine classic divergence trading setup is the stochastic oscillator & wait out for the stochastic indicator lines to move in the direction of the divergence signal so that to confirm the signal.

Another good technical indicator to combine with this setup is the moving average indicator, in this technical indicator a xauusd gold trader should use the MA Cross-over System to confirm the signal generated by the divergence trading setup.

Example illustration of Moving Average MA Crossover Method

How to Trade the Classic Bullish Gold Trading Divergence and Classic Bearish Gold Divergence Combined with Moving Averages

MA Cross over Trading Method Combined with Classic Divergence Setup

Once the divergence trading signal is given/generated, a trader will then wait for the Moving Average cross-over method to give a trading signal in the same market direction, if there's a classic bullish divergence trading signal, a trader will wait for the moving average crossover method to give an upwards crossover signal, while for a bearish classic divergence trading signal the trader should wait for the Moving average cross-over strategy to give a downward bearish cross over signal.

By combining the classic divergence signals with other indicators this way, a trader will be able to avoid whipsaws when it comes to trading the classic divergence trading signals, because the trader will wait until the market has actually reversed and is already moving towards the generated signal direction - hence the trader will not fall into the trap of picking the market tops and market bottoms by entering transactions before the actual divergence trading setup has been confirmed.

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