How to identify hidden divergence signals

The figure below shows the bearish hidden divergence, with prices making lower highs but oscillating indicators making higher highs:

Bearish hidden divergence is a signal that helps traders identify a potential return with a high probability of returning to a downtrend.

Principle of entering and exiting orders with bearish hidden divergences

There are 2 trading setups with bearish hidden divergence, one uptrend and one in a downtrend. In these 2 setups, we both use the EMA 20 and the 50 EMA.

The figure below is in a downtrend:

The principle is as follows:
  1. The 20 EMA is below the 50 EMA and the price is operating below the 20 EMA.
  2. When the above conditions are met, we find a pullback to the EMA and form a lower high. In this pullback, the price needs to close above the 20 EMA, and after that price pulls back to close below the 20 EMA.
  3. When the price has formed a lower high, we check for divergence on the stochastic. If so, it is a sell signal.
  4. Open a short position with the candle closed below the 20 EMA or place a sell limit above the closing price to get better entry points.
  5. Stop loss above the lower high, and take profit at a 1: 2 ratio. When the take profit is reached, we can move the stop loss to breakeven and take a portion of the profit.
The figure below is a hidden divergence in an uptrend:

The principle is as follows:
  • The 20 EMA should be above the 50 EMA, and the market is trading above the 20 EMA.
  • Wait for the market to form a lower high.
  • Then check the stochastic for hidden divergence forming or not.
  • Then wait for the price to close below the 20 EMA and then back up above the EMA.
  • Open a short position at the close of the bearish candlestick below the 20 EMA or place a sell limit above the closing price for better entry points.
  • Place stop loss above the lower high, and take profit at 1: 2 ratio.
Let us now go through a few examples.

Example 1: EUR USD in H1 frame 

Here is a signal of hidden divergence on a downtrend:

  • We see the 20 EMA is below the 50 EMA and the market is also working below the 20 EMA.
  • First, bounce back to 20 EMA and back. At this point, there is no hidden divergence, but a lower high. But the second recovery closed above the 20 EMA but then turned down for 2 candles and closed below the 20 EMA forming the next lower high.
  • At this time, the stochastic showed signs of hidden divergence.
  • Open a short position at 1.0950.
  • Place stop loss at 1.0965 (15 pips) and take profit at 30 pips.
And the figure below is the next chart part:


Example 2: USD JPY in H1 Frame 

Divergence is hidden in an uptrend:

  • On the left side of the chart, you can see that the price is in an uptrend.
  • Then the market fell below the 2 EMA and then increased again. At this time, 20 EMA crosses above 50 EMA, showing a trend change.
  • Then the market turned back below the 2 EMA and closed below it and made a lower high.
  • Check on the stochastic for hidden divergence appearing or not. If so, it is our sell signal.
  • The market closed close to 113.40. You can place the sell limit at 113.40.
  • Stop loss at 113.60 (about 20 pips). Take profit of 40 pips.
And the figure below is the next chart:


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