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Divergence Trading Strategy

Updated: Aug 13, 2021

Divergence Trading Strategy







Hidden Divergence vs Regular Divergence

Hidden divergence is a sign of trend continuation, while regular divergence is a sign of trend reversal. The idea is that regular divergence shows momentum leaving the trend, which could be an early sign of a reversal. Hidden divergence shows momentum coming into the current trend, which makes a continuation more likely.


The charts below show examples of both hidden divergence and regular divergence. I’ve marked the bullish divergence in green and the bearish divergence in red.




In the chart above, you can see some examples of hidden MACD divergence. Hidden divergence is measured off of the lows of price and the indicator during an uptrend, and off of the highs of price and the indicator during a downtrend (the opposite of regular divergence).


Starting from the left, price made higher lows while the histogram made lower lows. Next, price made higher lows while the histogram made a double bottom. These are both examples of bullish hidden divergence.




Tips for Trading Hidden Divergence

One technique that can greatly increase your success rate with divergence trading is combining your various divergence patterns with other entry triggers. For the sake of this article, we’ll be using candlestick patterns in combination with hidden divergence.


In the previous chart (above), you’ll notice that I’ve highlighted two candlestick patterns. The first was a bullish engulfing candlestick pattern, and the second was a morning star candlestick pattern. Both of those signals could have helped you time your entry off of those two hidden divergence patterns.





In the chart above, you can see an example of bearish hidden stochastic divergence. Price made a lower high while the stochastic oscillator made a higher high. Remember that, for hidden divergence, we measure off of the highs of price and the indicator in a downtrend.


After this hidden divergence pattern occurred, a bearish engulfing candlestick pattern also occurred. This strong bearish signal could have helped you get the best entry with this setup. Do you see how the candlestick pattern strengthens the case for the hidden divergence pattern and vice versa?


In the chart above, you can see an example of bearish hidden RSI divergence. Price made a lower high while the RSI made a higher high. A bearish engulfing pattern formed at the second high, confirming our hidden divergence pattern.


The candlestick signal that I highlighted above was not the first candlestick signal to occur at the lower high. However, if you had correctly placed your stop loss above the highest point in the cycle, this trade would have worked out anyway.


Final Thoughts

The difference between hidden divergence and regular divergence is that hidden divergence is drawn off of the highs of price and the indicator in a downtrend. Similarly, it’s drawn off of the lows of price and the indicator in an uptrend. This is the opposite of regular divergence.

Hidden divergence also signals a possible trend continuation. Regular divergence signals a possible trend reversal. Both can be powerful entry signals when combined with other profitable trading strategies.

So… hidden divergence vs regular divergence? Which do you prefer to trade? Let me know in the comments below. In my own experience, I’ve found regular divergence to be more useful, but I use both hidden and regular divergence on a regular basis.


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