|Education - STEP 12|
Concept of the Hidden Divergence
If the Divergence can be observed in the Oscillator but cannot be seen in the price then this type of Divergence is the Hidden Divergence. Hidden Divergence is also termed as Reverse Divergence, Continuation Divergence or Trend Divergence. The price direction shown by the Hidden Divergence is of past time so it is an indicator to signal the past price direction. In the case of Hidden Divergence, price trend contradicts the direction that is indicated by the lower lows or higher highs. Reversal observed in case of the Hidden Divergence is short-lived and the price will again start moving in the trend direction and thus it confirms the trend continuation and Forex Trading in this situation is less risky as compared to the Forex Trading in the reversal entry.
The traders and investors rely more on the bullish Hidden Divergence because using this indicator traders will always trade in the trend direction and can enter a trade just before a rally that may be sometimes very profitable. Best advantage of the Hidden Divergence can be taken by placing the 50 bar MA (Moving Average) on the price chart along with the favorite Oscillator at the lower side. Stochastic can be a good example. This will show an uptrend for the going period. After observing the uptrend, wait for the few series of pullbacks. The aim is to watch a higher swing low on the price chart with a lower low existing in the Oscillator. This will confirm the bullish Hidden Divergence and will predict a rally.
Conditions of the Hidden Divergence
The two conditions forms in the Hidden Divergence are explained below.
The signal given by the higher highs shown in the Oscillator and lower highs shown in the price confirms the price trend in the downward direction.
The signal given by the lower lows shown in the Oscillator and higher lows shown in the price confirms the price trend in the upward direction.
Hidden Divergence is used to compare the lower lows shown in the indicator with the higher lows shown in uptrend or the higher highs shown in the indicator with the lower highs shown in the downtrend. This indicator signals the continuation of the trend so the traders and investors should trade accordingly. Many traders will prefer to open new positions in this situation. The two price charts below shows the examples of the Regular Divergence.
As shown in the figure above the red line on the price chart shows the higher lows and compares with the lower lows on the Stochastic Indicator shown by another red line and this is the example of the Hidden Divergence in an uptrend.
As shown in the figure above the red line on the price chart shows the lower highs and compares with the higher highs on the Stochastic Indicator shown by another red line and this is the example of the Hidden Divergence in a downtrend.
A comparison of Regular and Hidden Divergence is shown in the figure below.
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