Hidden divergence

Before reading this lesson, you should have previously read through:

Hidden divergence is similar to 'standard' divergence – where the price of an asset and an indicator move in opposite directions.

Hidden divergence can tell you ahead of time when a trend looks set to continue. This allows you to enter a trend when it still has further to run.

However, while regular divergence can alert you ahead of time to a possible reversal, or change in the price direction, hidden divergence can tell you ahead of time when a trend looks set to continue.

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Identifying hidden divergence

There are common indicators that are used for hidden divergence, but almost any indicator can be used.

To find signs of hidden divergence and the possible continuation of a trend, you first need to choose an indicator to use and to identify that a trend is taking place.

Common indicators to use are the stochastic indicator, the MACD and the OsMA. However, almost all indicators can be used to find divergence. Throughout this lesson, we will show you different examples using different indicators.

Bullish hidden divergence

When a price makes higher lows but the indicator makes lower lows, this suggests an uptrend will continue. When a price makes lower highs but the indicator makes higher highs, this suggests a downtrend will continue.

If the price of an asset makes a series of higher lows, this can denote an uptrend is underway.

If you spot that the indicator has at the same time made a series of lower lows, you have identified hidden divergence. In this case, it suggests that the uptrend will continue and you could choose to go long, or buy, the asset.

The image below shows how such bullish hidden divergence appears on a chart:

Hidden divergence bullish

number_1 You can see that both the price is making a higher low, whilst the indicator is making a lower low. This means that the price is set to continue up.

Bearish hidden divergence

If the price of an asset makes a series of lower highs, this can indicate that a downtrend is underway.

If you spot that the indicator has at the same time made a series of higher highs, you have identified hidden divergence. In this case, it suggests that the downtrend will continue and you could choose to go short, or sell, the asset.

The image below gives an example of this bearish hidden divergence:

Hidden divergence bearish

number_1 You can see in the chart that the price is making a lower high, whilst the indicator is making a higher high. This indicates that the price is set to continue down.

Identifying hidden divergence takes practice and it is recommended that new traders focus on standard divergence first. You can then incorporate hidden divergence into your trading at a later date.

Trading hidden divergence

Hidden divergence can help you enter into a trend. It should always be used as part of a wider trading strategy though, which will define your entry, stop loss and profit target.

The following table gives you an overview of what kind of hidden divergence is taking place based on the behaviour of the price action and indicator, and what kind of a trade you could then place:

Type of divergencePrice actionIndicator*Type of trade to place
Hidden bullish divergenceHigher lowLower lowLong trade
Hidden bearish divergenceLower highHigher highShort trade

* Common indicators to use for hidden divergence are stochastic, MACD as OsMA, but almost any indicator can be used.

You can practice what you have learnt about hidden divergence in the exercises below:

Exercise 1: Where is the hidden divergence? Show exercise
Exercise 2: Where is the hidden divergence? Show exercise

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Works best with longer time frames

The higher the time frame that you use to look for hidden divergence, the longer it can take for the trend continuation to actually happen. Because of this, hidden divergence tends to work best over longer time frames.

Hidden divergence tends to work best over longer time frames. With short time frames, by the time you have spotted hidden divergence, the trend may already have completed.

Although it can also work with shorter time frames, be careful – by the time you have spotted hidden divergence the continuation of the trend may already have occurred and completed.

Trading with multiple time frame analysis

Hidden divergence can work well with multiple time frame analysis. For example, you could look for hidden divergence to identify a trend continuation on a higher time frame, but use a lower time frame to choose an entry point.

The image below uses a 30 minute chart to find the hidden divergence, but a 5 minute chart to pick an entry point:

Hidden divergence 30 minute entry
number_1 The highlighted area shows where the hidden divergence has occurred on a 30 minute chart signalling a continuation of the down move.

You can use the 5 minute chart to look for an entry in the same direction as the continuation.

Hidden divergence entering trade on 5 minute chart
number_1 The line at which the hidden divergence was confirmed on the 30 minute chart.
es2 Short trade initiated once the price broke through the support level in the recent range.

Summary

In this lesson, you have learned that…

  • … hidden divergence is similar to standard divergence – where the price of an asset and an indicator move in opposite directions.
  • … it can tell you ahead of time when a trend looks set to continue, allowing you to enter a trend when it still has some time to run.
  • … if the price of an asset makes a series of higher lows but the indicator makes a series of lower lows, this suggests the price’s uptrend will continue.
  • … if the price of an asset makes a series of lower highs but the indicator makes a series of higher highs, this suggests the downtrend will continue.
  • … identifying hidden divergence takes practice and it is recommended that new traders focus on standard divergence first.
  • … hidden divergence should always be used as part of a wider trading strategy, which will define your entry, stop loss and profit target.
  • … it tends to work best over longer time frames – with short time frames, by the time you have spotted hidden divergence, the trend continuation may already have completed.
  • … it can however work well with multiple time frame analysis – looking for hidden divergence to identify a trend continuation on a higher time frame but using a lower time frame to choose an entry point.

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  • If price is making higher highs, but volume is decreasing, does this count as divergence? And I would think it indicates a reversal to the downside?
  • Hi Pockettones,
    yes divergence is anything where price and underlying demand or momentum is showing discrepancy. However the most commonly used divergence indicators are MACD, RSI, Momentum, Stoch, CCI. It is also important to note that divergence does not necessarily indicate a full reversal but often only a correction of the underlying trend.
    Regards.
    Peter
  • I`m just a little confused !

    Hidden divergence seems like the exact opposite of Divergence . isn`t it ??
  • Opposite in a sense that the price and indicator behave the opposite way as we see with the regular divergence. And also regular divergence is a reversal, the hidden divergence a continuation pattern!
  • in the first exercise , it is funny that we have divergence and hidden divergence at same time !!!!
  • I find it quite advance and confusing.
    It seems like bullish divergence and bearish hidden divergence are interwoven with each other and is very hard to see which is actually real. It's like looking at some puzzle and finally seeing a shape which always was there but not seeing before.
  • Hi Harnas,
    My advice is to keep an eye out only for one of them - especially at the beginning. The normal divergence is much more common(ly used) so I would start with that.
    Regards.
    Peter
  • ok so can someone tell me if im getting this right.

    On an Uptrend. S.D = H-H & H.D = H-L (Price Action)
    On a Downtrend. S.D = L-L & H.D = L-H (Price Action)

    On an uptrend. S.D = L-H & H.D = L-L (indicator)
    On a downtrend. S.D = H-L & H.D. = H-H (indicator)

    if thats the case can't you say that there is H-Ls on a S.D. price action uptrend or H-Hs on a H.D. price action uptrend as well? simply because in an uptrend you have both H-Ls as well as H-Hs ? correct?

    Thanks
  • Hi Grungeboy,
    I would love to try to answer your question but can you help me out with the abbreviation you used?
    Regards.
    Peter
  • Hi hindsighthero,

    so the abbreviations are as follows...

    Standard Divergence = S.D
    Hidden DIvergence = H.D
    High-HIghs = H-H
    Low-lows = L-L
    Low-Highs = L-H
    High-Lows = H-L

    btw do you guys also teach binary options?
  • Not sure about the formulas, but here's how I would put them:
    Standard divergence:
    Price: in uptrend higher high or downtrend lower lows
    Indicator: no higher highs or no lower lows

    Hidden divergence:
    Price: in downtrend higher lows or uptrend lower highs
    Indicator: lower low or higher high
  • Thanks hindsighthero.

    In terms of binary options trading, do you guys teach that on this site?
  • We don't do education on binary options. We had a webinar on vanilla options please have a look at it:
    http://en.tradimo.com/news/free-vanilla-options-trading-webinar--tue-3rd-febr_186276/

    You can trade plain options with the following brokers:
    AvaTrade
    Plus500
    CapTrader

    Let me know if you have any questions
  • Quick question; Are Indicators on charts or below based on market volume? Anything
    appreciated.

    Kind regards

    Sanj
  • Hi Sanj,
    Mostly volume indicators are based on volume such as: Volume, On Balance Volume, or MFI or ADI also tracks volume

    Most other indicators however do not take volume into account.

    Regards.
    Peter

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