Hidden Divergence

Hello there, you will be excited about the information contained in this report.

Isnt it remarkable how people like us who are in the Trading business have taken
frequently interesting words that are used each day and turned them around to meet
our own needs?

Let me explain. Words such as trend, and line, for example are generally used
together in a sentence. The first word in the sentence would be trend, and it is an
adjective that describes the next word, line, which is a noun. In this example, they are
two separate entities.

However, in the trading world, when both words are combined to read trend line, it
becomes one entity because it is compounded into the word, trendline. This word is
only for those who can wrap their minds around the thought of using a word that
cannot be found either in the dictionary or a part of the rules of the English Language.

The word, Divergence, has the same connotation

If you were to look in the major search engines such as Google, you would find that
the word, divergence has nothing to do with trading. In the trading industry, however,
the word, divergence, has a whole meaning of its own.

We are about to explore it in ways that will help you to recognize and authenticate
higher trade probabilities.

To increase your profit margin, you should utilize the resources and tools that you
have available to you as it relates to a combination and formations of MACD and RSI
divergent.

1
 Warning: Do not be perplexed or be confused with the regular trendlines and
the ones related to divergence.

When you are in the process of drawing a standard bullish trendline, you will have to
connect the higher, lows to connect them. On the other hand, when you are in the
process of drawing the usual bearish trendlines, you have to connect the lower,
highs.

Lets look at the the different between this and divergence.

Hidden Divergence versus Divergence

Divergence

A lot of people like me get involved in day trading. I use various strategies in my day
trading that include trendlines and other indicators, but divergence has equal
significance when it comes to currency strength and weakness calculations.

Most of my trades close within a twenty four time frame after I enter the market.
However, I have reached the realization that if divergence is understood and used in
the right way, it can be the best trading asset that any trader can ask for especially if
utilized at the higher time periods that include daily, weekly and monthly charts.

The Reason: The MACD indicator results in a stronger and more precise signal when
the long term data calculations are made.

In the chart below, you will see the new lows in the series. The vertical lines that point
downward, relate to the new lows that are located on the MACD indicator. However,
you will notice, too, that the new MACD lows failed to reach a similar depth as the
preceding low. Each of these lows was higher. There are a few things to note here:

2
 This is specifically known as bullish divergence
Bullish is the adjective here to describe the type of divergence related to this
chart. Bullish is considered by the indicator direction and not from the price
chart.
To be more precise, the opposite is true for bearish divergence when the price
increases at the time when the indicator moves down.
On the other hand, when the price moves decreases at the same time that the
indicator is moving up, it is called bullish divergence.
The MACD expresses the probability for a market increase when the above
price is reexamined for a previous low while coinciding with the increase in the
MACD.

Below, we have an illustration of bearish (regular) divergence.

3
Additionally, the chart below shows the comparison between the MACD and the price
chart. It gives you a warning of the reversal opportunity and trendline break
confirmation identified by the color red on the price chart, on the MACD and the RSI.

4
You can find the divergence using other indicators even though the MACD is the ideal
determinant when it comes to divergence. An example is shown in the RSI chart.

There is another divergence form that we will discuss in this lesson.

5
Hidden Divergence

Before we take a look at Hidden Divergence, lets consider something of significance

here:

Divergence is an indicator of a possible repeat or reversal in the market. This kind of

activity is in opposition to Hidden Divergence. Why? HD or Hidden Divergence is a
confirmation of a continuous trend in the market.

Therefore, if you see anything that looks like HD, but it DOES NOT put you back into
the trend, then it is not to be considered Hidden Divergence.

This means that bearish Hidden Divergence shows up in a market that has the trend
going down, while conversely, the bullish Hidden Divergence shows up in a market
that has the trend going up.

Therefore, it is safe to say that Hidden Divergence is the opposite of its corresponding
part the Divergence.

6
 Now follow along with me..

IF

The displayed chart below reflects Bullish Divergence at the time when the
price is extremely reduced while at the same time the matching indicator
achieves higher lows.

AND

The displayed Bearish Divergence at the time when the price shows an
extreme high while the matching indicator achieves lower highs.

7
THEN

In comparison, Bullish Hidden Divergence is shown at the time when the price
gets to higher lows while the matching indicator achieves lower lows.

8
Be reminded: The initial trend (below) was bullish (red) and therefore the formation of
the Hidden Divergence results in the potential for it to go back to a bullish trend.

9
When the hidden divergent indicator is corroborated with trendline breaks on the price
chart and the RSI is backed up by an ensuing retraction to the price trendline even as
the RSI has made its way into bullish terrain

We are not afraid to enter the long side of the market

We have confidence to enter inside of the shaded area below because of its
heightened possibility trade.

10
When you enter into the market, you will find that a protective stop appears right away
below the previous low. This gives us a kind of secure net to reduce the risk aspect of
only 30 pips.

The Bearish Hidden Divergence is shown when price gets to a lower high while the
corresponding indicator achieves a higher high. This happens when there is a down
trending market.

In the chart below, a price retraction matches with a distinctive higher high on the
Stochastic oscillator. This indicates that there is a potential for the bearish move to

11
continue.

With corroboration being given by a trendline break on the price chart with a later
trendline break on the RSI matching up with the RSI left over in bearish terrain.

Once more, we are not afraid to go back in the market on the short side.
Put your protective stop a little above the past high and you will be more
confident.

Here is a good cheat sheet, which you can use. Put it as close to your computer as
possible so you can have it when you need it. That is what I did and it works for me.

Type of Divergence Price Oscillator Trade

Standard Higher High Lower High SELL
Standard Lower Low Higher Low BUY
Hidden Higher Low Lower Low BUY
Hidden Lower High Higher High SELL

12