What is bullish hidden divergence?

Divergence is basically the deviation of the price against a certain oscillator, for example when the price makes a higher low but the indicator creates a lower low. The divergence signals show that the price and the oscillating indicator are going out of phase, which means that either the current trend will reverse, or will end the correction and return to the original mainstream.


The bullish hidden divergence is when the price creates a higher bottom but the indicator creates a higher bottom, showing that the current downside correction wave is about to end and the price will return to the mainstream uptrend.

A bullish shadow divergence may also appear at the end of a downtrend, signs that the downtrend has weakened and is likely to reverse to bullish:


Divergence hides bullish - Trade setup

There are 2 trade settings for bullish hidden divergence signals. One is in an uptrend, the other in a downtrend.

We will add two lines ema - ema 20 and ema 50.

BUY ORDER RULES (UP trend):

  1. ema 20 is above ema 50 and price is above ema 20 (uptrend condition)
  2. The price pulls back to the area between the two ema lines and creates a higher low
  3. The price starts to close above ema 20 confirms the formation of a higher low.
  4. Entry BUY at the close of the bar above ema 20 or set BUY LIMIT lower than the closing price of this bar
  5. Stop loss at the higher bottom just created, take profit at 2R (double the stop loss distance), when the price is near to take profit, move SL to breakeven.
BUY ORDER RULES (DOWN trend):


1- The ema 20 line is below ema 50 and the transaction price is below ema 20 (the downtrend condition) (the picture above is wrongly drawn by the author)
2- Wait for the price to create a higher low
3- Consider Stochastic to see if there is an increasing hidden divergence, if Stochastic creates a lower bottom, it is satisfied
4- Wait for the price to close on ema 20 is the BUY entry
5- BUY at the close of the bar above ema 20 or BUY LIMIT below this level
6- Stop loss at the higher bottom just created, take profit 2R. When the price touches profit-taking, then move SL to breakeven.

Divergence is hidden bullish - Example

Example 1: We see a bullish hidden divergence in an uptrend


Proceed to place orders


Result


Example 2: A bullish divergence in a downtrend


Proceed to place orders


Result