How to Trade Hidden Bullish and Hidden Bearish Divergence
Hidden divergence trading setup is used as a possible sign for a trend continuation after the price has finished retracing. It is a signal that the original Gold price trend is resuming. This is the best divergence trading setup to trade because its signal is in the same direction as that of the continuing price trend.
Hidden Bullish Divergence
This hidden bullish divergence setup happens when price is making a higher low (HL), but the indicator is showing a lower low (LL). To remember them easily think of them as W-shapes on the price charts.
Hidden divergence signal occurs when there is a retracement in an upward gold price trend.
The example below shows this setup - from the screenshot the price made a higher low (HL) but the indicator made a lower low (LL), this shows that there was a hidden divergence trading signal between the XAUUSD price and the indicator. This hidden divergence trading signal shows that soon the market upward trend is going to resume. In other words it shows this was just a retracement in an upward trend.
Hidden Bullish Divergence Trading Signal - XAUUSD Trading Chart
This hidden bullish divergence trading signal confirms that the retracement move is complete and indicates underlying strength of an upward trend.
Hidden Bearish Divergence
Hidden bearish divergence trading setup occurs when price is making a lower high (LH), but the indicator is showing a higher high (HH). To remember them easily think of them as M-shapes on price charts.
Hidden bearish divergence trading setup occurs when there is a retracement in a downward trend.
The example below shows the hidden divergence trading setup - from this example the Gold price made a lower high (LH) but the indicator made a higher high (HH), this shows that there was a divergence between the XAUUSD price and the indicator. This shows that soon the market downward trend is going to resume. In other words it shows this was just a retracement in a downward trend.
Hidden Bearish Divergence Trading Signal - XAUUSD Trading Chart
This hidden divergence trading setup confirms that a retracement move is complete and indicates underlying strength of a downward trend.
Other popular indicators used are CCI indicator, Stochastic Oscillator, RSI and MACD indicators. MACD and RSI are the best indicators.
NB: Hidden divergence trading setup is the best type of divergence trading signal to trade because it gives a signal that is in the same direction with the current market trend, thus it has a high risk: reward ratio - because it provides for the best possible entry for opening a trade.
However, a trader should combine this setup with another indicator like the stochastic oscillator or moving average crossover method and buy when the indicator is showing the Gold price is oversold and price has left this region, and sell when the indicator is showing Gold price is overbought and the price has left this region.
Combining Hidden Divergence Setup with Moving Average Crossover Method
A good indicator to combine these hidden divergence trading setups is the moving average indicator using the moving average crossover method. This will create a good trading strategy for generating trading signals and confirming these trading signals before trading them.
Moving Average Crossover Method - Gold Trading Strategies
In this trading strategy, once the divergence trading signal is given, a trader will then wait for the moving average crossover method to give a buy/sell signal in the same direction:
- If there is a bullish divergence trading setup between the price and indicator, wait for the moving average crossover method to give an upward crossover signal before opening a buy trade.
- While for a bearish divergence trading setup wait for the moving average crossover method to give a downward bearish crossover signal before opening a sell trade.
By combining this hidden divergence trading setup with other indicators this way, a trader will avoid whipsaws when it comes to trading XAUUSD metal using this divergence trading setup.
Combining Hidden Divergence Trading Signal with Fibonacci Retracement Levels
For this example we shall use an upward market trend. We shall use the MACD indicator.
Because the hidden divergence trading setup show that the current price move is just a retracement in an upward trend we can combine this divergence trading signal with the most popular retracement tool that is the Fibonacci retracement levels.
The example below shows that when this hidden divergence trading setup appeared on the XAUUSD price chart, the price had just hit the 38.2% Fibonacci retracement level. When price tested this Fibonacci retracement level - this would have been a good level to place a buy order.
Combining Hidden Divergence Trading Signal with Fibonacci Retracement Levels
Combining Hidden Divergence Trading Signal with Fibonacci Expansion Levels
In the example above once the buy trade was opened, a trader would then need to calculate where to place their take profit order for this trade. To do this one would need to use the Fibonacci Expansion Levels.
The Fibonacci expansion levels were drawn on the price chart as shown below.
Combining Hidden Divergence Trading Signal with Fibonacci Expansion Levels
For this example there were three take profit levels:
- Fibonacci Expansion Level 61.8%
- Fibonacci Expansion Level 100.0%
- Fibonacci Expansion Level 161.8%
Using this hidden divergence trading strategy combined with Fibonacci tools would have provided a good trading strategy with a good amount of profit set using these Fibonacci expansion levels take profit levels.