Divergence Strategy
Hidden divergence trading strategy is used as a possible sign for a stock indices market indices trend continuation after the stock indices price has retraced. It's a signal that the original indices trend is resuming. This is the best divergence setup to trade because it's in same direction as that of the continuing market trend.
Divergence trading strategy
This divergence trading setup happens when stock indices trading price is making a higher low (HL), but the oscillator (indicator) is showing a lower low (LL). To remember them easily think of them as W-shapes on Chart patterns. It occurs when there is a retracement in an upwards Indices trend.
The examples illustrated below shows an image of this divergence trading setup, from the image the stock indices price made higher low (HL) but the indicator made a lower low (LL), this shows that there was a divergence signal between the stock indices price and indicator. This signal shows that soon the stock indices trading market up indices trend is going to resume. In other words it shows this was just a retracement in an upwards indices trend.
Divergence trading strategy
This confirms that a retracement move is complete and indicates underlying strength of an upwards indices trend.
Indices Hidden Bearish Divergence
This setup happens when stock indices trading price is making a lower high (LH), but the oscillator is showing a higher high (HH). To remember them easily think of them as M-shapes on Chart patterns. It occurs when there is a retracement in a downward Indices trend.
The example explained and illustrated below shows an image of this indices trading setup, from the image the stock indices price made lower high (LH) but the indicator made a higher high (HH), this shows that there was a divergence between the stock indices price & the indicator. This shows that soon the stock indices trading market down indices trend is going to resume. In other words it shows this was just a retracement in a downwards trend.
Divergence trading strategy
This confirms that a retracement move is complete and indicates underlying strength of a downwards indices trend.
Other popular technical indicators used are Commodities Channel Index indicator (CCI), Stochastic Oscillator, RSI & MACD. MACD and RSI are the best trading indicators.
NB: Hidden divergence is the best type to trade because it gives a signal that is in the same direction with the current market trend, thus it has a high reward to risk ratio. It provides for best possible entry.
However, a trader should combine this stock indices trading setup with another indicator like the stochastic oscillator or moving average and buy when the stock indices price is oversold, and sell when the stock indices price is overbought.
Combining Hidden Stock Indices Trading Divergence with Moving Average Indices Trading Crossover Strategy
A good indicator to combine these indices trading setups is the moving average indicator using moving average cross over method. This will create a good trading strategy.
Moving Average Crossover Technique - Divergence trading strategy
In this divergence indices strategy, once the trading signal is given, a trader will then wait for the moving average cross over technique to give a buy/sell stock indices signal in the same direction, if there is a bullish divergence set up between the stock indices price and indicator, wait for the moving average crossover system to give an upwards cross over signal, while for a bearish divergence setup wait for the moving average crossover system to give a downward bearish crossover signal.
By combining this Divergence trading strategy with other indicators this way a trader will avoid whipsaws when it comes to trading with this indices signal.
Combining with Stock Indices Fibonacci Retracement Levels
For this example we shall use an upward market trend. Stock Indices Trading - We shall use MACD indicator.
Because the hidden divergence is just a retracement in an upwards indices trend we can combine this stock indices signal with the most popular retracement tool that's the Fibonacci retracement levels. Examples explained below shows that when this stock indices set up appeared on trading chart, stock indices price had just hit the 38.20% level. When stock indices price tested this level, this would have been a good level to set a buy order.
Divergence trading strategy setup
Combining with Indices Trading Fib Expansion Levels
In the stock indices trading example above once the buy indices trade was placed, a trader would then need to calculate where to place the take profit for this trade. To do this a trader would need to use the Indices Trading Fib Expansion Levels.
The Fibo expansion was drawn as shown on stock indices chart as illustrated and shown below.
Divergence trading strategy setup
For this example there were 3 take profit areas:
Fibo Expansion Level 61.8% - 131 pips profit
Fibonacci Expansion Level 100.00% - 212 pips profit
Fibo Expansion Level 161.8% - 337 pips profit
From this divergence trading strategy combined with Fibonacci would have provided a good strategy with a good amount of profit set using these take profit areas.
