Understanding Hidden Divergence: A Signal for Trend Continuation

Hidden divergence is a powerful trading tool that signals the continuation of an existing trend. Unlike regular divergence, which alerts traders to potential trend reversals, hidden divergence helps trend-followers identify opportunities to enter the market in the direction of the prevailing trend. Let’s dive into the mechanics of hidden divergence and how to use it effectively.

What Is Hidden Divergence?

Hidden divergence occurs when price action and an oscillator move in opposite directions, but instead of signaling a reversal, it indicates that the trend is likely to continue.

Hidden divergence can be divided into two types:

Hidden Bullish DivergenceHidden Bearish Divergence

The key principle is to identify areas where price momentum suggests the trend will persist.

Hidden Bullish Divergence: Confirming an Uptrend

A hidden bullish divergence appears when:

Price makes a higher low (HL), signaling a continuation of the uptrend.Oscillator makes a lower low (LL), indicating a temporary loss of momentum that aligns with the trend.

This divergence is found in uptrends, and it provides traders with an opportunity to enter long positions early in the trend’s continuation.

How to Spot Hidden Bullish Divergence:

Observe the price forming a higher low.Compare this with the oscillator; if it forms a lower low, hidden bullish divergence is present.

For example, if a stock price makes a higher low while RSI makes a lower low, it suggests that the uptrend is gaining strength and likely to continue.

Hidden Bearish Divergence: Supporting a Downtrend

A hidden bearish divergence occurs when:

Price makes a lower high (LH), confirming the continuation of the downtrend.Oscillator makes a higher high (HH), reflecting a momentary divergence in momentum that aligns with the trend.

This type of divergence is observed in downtrends, offering traders the chance to enter short positions at favorable points.

How to Spot Hidden Bearish Divergence:

Identify the price forming a lower high.Check if the oscillator forms a higher high. If it does, this confirms hidden bearish divergence.

For instance, when a currency pair forms a lower high while MACD creates a higher high, it signals that the downtrend is likely to persist.

How to Trade Hidden Divergence

Hidden divergence is ideal for traders who follow trends, as it provides early entry signals for trend continuation.

Confirm the Trend: Ensure that the market is in an established uptrend or downtrend.Spot the Divergence: Look for price action and oscillator discrepancies that align with hidden bullish or bearish divergence.Enter the Trade:

In an uptrend, buy when hidden bullish divergence appears.In a downtrend, sell when hidden bearish divergence forms.

Set Stops and Targets: Place a stop-loss just beyond the recent swing high or low and use Fibonacci levels or prior support/resistance zones to set profit targets.

Key Differences Between Regular and Hidden Divergence

Regular Divergence: Signals a potential trend reversal.Hidden Divergence: Indicates trend continuation.

Why Hidden Divergence Matters

Hidden divergence is a valuable tool for traders who prefer to follow the trend rather than anticipate reversals. By using hidden divergence, traders can:

Enter trends early and capitalize on their continuation.Reduce the risk of false signals often associated with reversal trading.Enhance their confidence in aligning trades with the dominant market direction.

Final Thoughts

Hidden divergence is an essential component of a trend-following strategy, allowing traders to identify opportunities to enter the market in the direction of the prevailing trend. While spotting these divergences requires practice, mastering them can significantly improve trading performance. In the next lesson, we’ll explore real-world examples of divergences and demonstrate how to trade them effectively.

Understanding Hidden Divergence: A Signal for Trend Continuation

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