RSI Divergence with Trendline Break
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Hidden Divergence by www. And as such, they are written as two entities. Divergence is such a word In our world, divergence has taken on a characteristic all its own. So, sit back and relax as we delve into its nature and combining the trend line with divergence we may use it to identify and confirm higher probability trades. In this lesson do not confuse divergent trendlines with your standard trendlines.
Subsequently, when drawing your standard bearish trendlines, they are drawn connecting lower highs. Hidden Divergence Divergence As many of you well know, most of my trading is intra-day.
Generally speaking, I am a Day Trader. While indicators and trendline breaks are a large part of my trading strategy, divergence can be equally important in calculating strength and weakness of any currency.
This is because indicators such as the MACD give stronger and more accurate signals when longer-term data is calculated. If you follow the vertical lines downward, you can see that these valleys on the price chart coincide with new lows on the MACD indicator. This is called divergence; and in this case, specifically, bullish divergence. When using an adjective to describe standard divergence, it takes its name from the direction of the indicator not the price chart.
Conversely, when the price moves downward, while the indicator moves upward, we call this bullish divergence. When the price above retested the previous lows and subsequently coincided with the MACD rising - divergently, we know that the MACD is expressing a potential for the market to increase in strength.
As can be seen in the subsequent chart below, the contrast between the price chart and the MACD provided forewarning to a tremendous reversal opportunity; which, by the way, was confirmed by trendline breaks red on the price chart, on the MACD, and on the RSI. Below, we have an example of bearish standard divergence. And as can also be seen in the chart below, the contrast between the price chart and the MACD provided forewarning to a combining the trend line with divergence reversal opportunity; which also was confirmed by trendline breaks red on the price chart, on combining the trend line with divergence MACD, and on the RSI.
Although the MACD is ideal for determining divergence, divergence combining the trend line with divergence also be found in other indicators as well - such as in this chart of the RSI. Later in this lesson, you will see the Stochastic used to signal a form of divergence as well. So, if you see what you think is HD but it Does Not take you back into the trend In other words, bullish HD appears in up-trending markets while bearish HD appears in down-trending markets.
So, please follow me here IF Bullish Divergence below is displayed when price reaches lower lows while the coinciding indicator reaches higher lows. AND Bearish Divergence is displayed when price reaches higher highs while the coinciding indicator reaches combining the trend line with divergence highs. THEN In contrast, Bullish Hidden Divergence is displayed when price reaches higher lows while the coinciding indicator reaches lower lows.
The original trend below was bullish red and so the HD formation signals a potential return to the bullish trend. We have no fear of entering on the long side of the market. Entering anywhere within the shaded area below would be a high probability trade. And as we can see below, the bullish ride would have been substantial.
Once again, we have no fear of re-entering the market on the short side.