Hidden Divergence

Understanding Hidden Divergence

• Hidden divergence is a market phenomenon where the price action diverges from an oscillator, indicating a potential continuation of the existing trend.
• It occurs when the price form higher lows while the oscillator forms lower lows (hidden bullish divergence) or when the price forms lower highs while the oscillator forms higher highs (hidden bearish divergence).
• This type of divergence is often used by traders to identify set-ups that support trend continuation, rather than reversals. 🤑

Types of Hidden Divergence

• Hidden Bullish Divergence: This indicates that despite the price making higher lows, the oscillator is making lower lows, suggesting the prior upward trend is likely to continue.
• Hidden Bearish Divergence: Here, the price creates lower highs while the oscillator registers higher highs, indicating that the downward trend is likely to persist.

Identifying Hidden Divergence with Indicators

• Many traders utilize dedicated divergence indicators, such as the one from the EASY series, which can quickly identify both regular and hidden divergences using various oscillators, including RSI and MACD.
• This tool enhances accuracy by providing visual signals, making it easier to spot potential continuation signals in the market. 🎯
• Some indicators also integrate filtering options to isolate the strongest divergence setups, improving overall trading decisions.

Practical Applications in Trading

• Hidden divergences are typically employed for setting up trades in the direction of the trend, often alongside momentum indicators to confirm the strength of the movement.
• Traders can combine other tools, like the Donchian breakout feature found in some advanced divergence indicators, to increase the reliability of their signals.
• Being able to distinguish between hidden divergences and regular divergences is crucial for successfully implementing this strategy in real trading scenarios.

Common Obstacles and Best Practices

• One of the most significant challenges with hidden divergence is the risk of false signals; thus, combining it with other forms of market analysis, such as trend lines or candlestick patterns, is advisable.
• Additionally, traders should ensure they are considering the context of the overall market environment and not just relying on divergence signals alone. ⚠️