Hidden Divergence. Trend Reversals and Continuations

Divergences: Trend Reversals and Continuations

Divergences are a powerful tool in technical analysis, capable of identifying both trend reversals and continuations. They serve as important signals for all types of financial markets, whether you trade stocks, cryptocurrencies, or commodities.

 

One of the golden rules of trading states: “The trend is your friend.” Thus, when a divergence signals the continuation of a trend, it presents an excellent opportunity for action.

Hidden Bullish Divergence: A Signal for Trend Continuation

 

Hidden bullish divergence occurs when the price forms a higher low, while the chosen indicator (e.g., RSI, MACD, or Stochastic) shows a lower low.

 

This phenomenon appears in an uptrend when the price pulls back but establishes a higher low compared to the previous one. If the indicator, on the other hand, shows a lower low, it signals that the uptrend is likely to continue.

 

How to Use It?

1.Identify the current trend (in this case, an uptrend).

2.Spot the moment when the price forms a higher low.

3.Check whether the indicator forms a lower low.

4.If these conditions are met, it’s a signal to open a long position.

Hidden Bearish Divergence: Confirmation of a Downtrend

 

Hidden bearish divergence occurs when the price forms a lower high, while the indicator shows a higher high.

 

This phenomenon is typical for downtrends. When the price pulls back upwards but the high is lower than the previous one, and the indicator instead shows a higher high, it confirms that the downtrend is likely to persist.

 

Practical Application:

1.Ensure the market is in a downtrend.

2.Identify a pullback where the price forms a lower high.

3.If the indicator forms a higher high, this signals an opportunity to enter a short position.

Why Is This Important?

 

Hidden divergences help traders by:

1.Reinforcing trend confidence. They confirm the ongoing market momentum.

2.Reducing risks. Timely detection minimizes potential losses.

3.Maximizing profits. Identifying trend continuation points allows for optimal market entry.

Key Takeaways

•Classic divergences signal potential trend reversals.

•Hidden divergences indicate the continuation of the current trend.

 

If you’re trading with the trend, pay special attention to hidden divergences. Recognizing them early not only confirms the existing trend but also highlights strategic entry points.

 

Mastering these signals takes practice, but they will become a reliable ally in your decision-making process across all financial markets.