How to Trade Classic Bullish Divergence and Bearish Divergence Setup
In trading, classic divergence is used as a possible sign for a trend reversal and is used by Gold traders when searching for an area where the price could reverse & start going in the in the opposite trend market trend market trend market trend market trend market trend market trend market trend direction. For this reason this trading setup is used as a low risk entry method and also as an accurate to exit of a trade position.
This trading strategy is a low risk technique to sell near the top or buy near the bottom, this makes the risks on your trade positions transactions are very small relative to the potential reward. However, this is one technique with very many fake out whipsaw signals & most traders do not recommend using it.
Divergence in Trading is also used to predict the ideal optimum point at which to exit a trade position. If you already have an open position that's already profitable, a good way to identify a profit taking level would be the point where you identify this trading setup.
There are two types, based on the direction of the trend:
- Classic Bullish divergence
- Classic Bearish divergence
XAUUSD Classic Bullish Divergence
Classic bullish divergence setup pattern forms when price is making/forming lower lows ( LL ), but oscillator is making higher lows (HL). The example depicted and demonstrated below highlights a picture of this trading setup.
XAUUSD Classic Bullish Divergence Trading Setup
This illustration uses MACD as a divergence technical indicator.
From the example illustration revealed above the price made a lower low(LL) but trading indicator made a higher low(HL), this highlights there is a divergence setup between the price and the technical indicator. The signal warns of a possible price trend direction reversal.
Classic bullish diverging signal warns of a possible reversal in the trend from downwards to upward. This is because though the price headed lower the volume of the sellers that moved price lower was less as depicted by the MACD indicator. This signifies underlying weakness of the down-ward trend.
Classic bearish Divergence Trade Setup
Classic bearish divergence pattern setup occurs when price is showing a higher high ( HH ), but the oscillator is lower high (LH). The screen shot below shows an example illustration of the setup.
XAUUSD Classic Bearish Divergence
This example also uses MACD indicator
From the example illustration revealed above the price made a higher high(HH) but the technical indicator made a Lower High(LH), this highlights there is a divergence setup between the price and the technical indicator. The signal warns of a possible price trend direction reversal.
Classic bearish diverging signal warns of a possible change in the trend from upwards to downward. This is because though the price headed higher the volume of the buyers that moved price higher was less as depicted by the MACD indicator. This indicates the underlying weakness of the upward trend.
In the illustration presented above, if you had used divergence setup pattern to trade you would have gotten good trading signals to enter or exit the trade transactions at an optimal point. However, divergence signals just like other technical indicators, is also prone to whipsaw signals. That is why it's always good to confirm the divergence trading signals with other indicators such as the RSI, MAs & Stochastic Oscillator Indicator.
A good indicator to combine classic diverging setups is the stochastic oscillator and wait for the stochastic oscillator lines to move in the direction of the divergence setup so that to confirm the trading signal.
Another good technical indicator to combine with is the moving average Moving Average trading indicator, in this trading indicator a xauusd gold trader should use the Moving Average Cross Over Strategy
Examples of Moving Average Cross over Technique Strategy
Once the divergence trading signal is generated, a gold trader then will wait for the Moving Average cross over system to give a signal in the same trend direction, if there's a classic bullish setup, a trader will wait for the moving average system to give an upwards cross over signal, while for a bearish classic divergence signal the trader should wait for the Moving average crossover system to give a downward bearish cross over signal.
By combining the classic divergence trading signals with other indicators this way, a trader will be able to avoid whipsaws when it comes to trading the classic divergence setup signals, because the trader will wait until the market has actually reversed and is already heading towards this direction, hence the trader won't fall into the trap of picking the market tops & bottoms.
Learn More Tutorials and Courses:
- How to Trade XAUUSD
- How Can I Trade Fibo Extension Settings in MetaTrader 4 Platform Software?
- XAUUSD Platform MT4 XAU USD Platform/Software Connection Bars on Status Bar
- What's a Gold Stop Loss
- Head & Shoulders & Reverse Head & Shoulders XAUUSD Patterns
- XAU USD MAs
- Introduction to MetaTrader 4 XAU USD Dashboard
