In this chapter –
Normal divergence can provide insight into a potential market reversal ahead of time. Hidden divergence can provide insight into the potential trend continuation ahead of time.
You are looking for divergence between price and the indicator, however, with hidden divergence you are looking for the opposite set of signals to normal divergence. Also, Hidden divergence operates similarly to standard divergence, as it also involves comparing the price action on the main chart with the movement of an indicator.
To spot hidden divergence and predict the continuation of a trend, your first steps are to select an appropriate indicator and confirm that a trend is currently happening.
Like Standard Divergence, In this case also, the popular choices for this purpose include the stochastic indicator, the MACD, and the OsMA. However, nearly all indicators have the potential to reveal divergence. In this lesson, we’ll provide various examples using different indicators to demonstrate how hidden divergence can be identified in different market scenarios.
The two types of hidden divergence found are called –
When the price of an asset forms a series of higher lows, it usually indicates that an uptrend is occurring.
If you notice that the indicator, at the same time, is making a series of lower lows, this is a clear identification of hidden divergence. In this scenario, the hidden divergence suggests that the uptrend is likely to continue, offering a potential opportunity to go long, or buy, the asset.
The image below provides a visual representation of how this bullish hidden divergence is manifested on a chart. From the chart example we can see price making a series of higher lows denoting an uptrend. The indicator, however, is making a series of lower lows.
Here goes the aftermath ->
This is a trend continuation signal that normally precedes price moving in the same direction, potentially setting up a long trade. The easiest way to look for bullish hidden divergence is to first look for a market that is in an uptrend.
When the price of an asset forms a sequence of lower highs, it typically signifies that a downtrend is in progress.
If, simultaneously, you observe that the indicator is making a series of higher highs, this is an instance of hidden divergence. This specific scenario indicates that the downtrend is likely to persist, presenting an opportunity to consider going short, or selling, the asset.
The image below illustrates an example of this bearish hidden divergence. We can see price making a series of lower highs denoting a downtrend. The indicator, however, is making a series of higher highs. There is hidden bearish divergence between the price and the indicator.
The market direction then continues with the downtrend.
It takes practice to spot hidden divergence.
It is recommended that if you are new to this concept you should concentrate on standard divergence first. Once you are used to finding standard divergence you can then incorporate hidden divergence into your trading at a later stage.
There are some key points to remember when trading hidden divergence.
Once you’ve spotted hidden divergence you should also know what type of trade to look for.