Technical Analysis encompasses a wide ambit of tools and techniques, charts and patterns, trends and continuation that helps an investor or a trader to read the market movements. As the trend proceeds, with the help of technical analysis one can easily detect the movement of prices along with the appropriate entry or exit levels and henceforth take decide their trading strategy.
In this blog, we will learn about an interesting trading strategy using divergence, particularly hidden divergence.
This section will make us understand that divergences can not only be used to know the trend reversal but that can also signal the continuation of a current trend in its present direction. This perhaps, will help the investors to judge the entry levels as they will be able to determine the future possibilities of trend continuation.
With such an interesting note let us first understand hidden divergence and know as to how it can help us trade.
So let’s us proceed with each part accordingly as mentioned below:
What is hidden divergence?
Unlike regular divergence, which shows trend reversal, hidden divergence shows the continuation of the trend. It signals the current trend which is more likely to make a continuation. This occurs when the oscillator is making higher highs of lower lows while the price does not compliment the same. This kind of pattern is found in case of a correction or a consolidation in the present trend which indicates that the current trend is most likely to continue for some more time.
Hence, in a crux, hidden divergence basically shows a continuation pattern.
Types of hidden divergence
Hidden divergence can be either bullish or bearish:
Bullish hidden divergence
Bullish hidden divergence is basically seen in case of an uptrend when the prices are making higher lows; however, the oscillator shows the lower lows.
Given a chart pattern, in an uptrend, if you notice that when a price is making higher low, the oscillator does the same or not. If it doesn’t, then you are seeing a hidden divergence.
Bearish hidden divergence
This divergence occurs in a downtrend when the price is making lower highs but the oscillator makes a higher high.
The hidden divergence does not signal any kind of entry or exit levels, it only emphasises on the strength of the current trend. Accordingly, an investor or a trader looking at the chart shall decide on its position.
How to trade a hidden divergence:
Now, when we have understood as to what hidden divergence basis the trend, let us understand the concept on how to trade a hidden divergence with the help of candlestick pattern in the following chart.
In the above chart of Netflix INC., there are two hidden divergence. The current trend is downtrend. you will notice that the price is making lower high or trading at same level but the oscillator is making a higher high. This is the bearish hidden divergence. Now, if you notice accurately, you will find another pattern taking place post this in the chart as shown below:
In the above chart of Nifty 50., there are two hidden divergence. The current trend is uptrend. you will notice that the price is making higher low or trading at same level but the oscillator is making a lower low. This is the bullish hidden divergence.
Using divergence along with the other trading techniques such as MACD, moving average crossover, candlestick pattern makes it quite reliable for the investor to decide the entry or the exit level. Always remember that a divergence alone cannot signal the entry or exit, it will only allow you to observe and understand the upcoming or the continuation of the trend.
To conclude, hidden divergence should always be used as a long term strategy which will help you to define your entry targets, profitability and stop loss position.
Additionally, you may always select a less time frame manner to get into the trend for deciding the entry level and then can observe it for say an hour to understand the trend continuation.
