Hidden divergence

USDNOK. I don't trade exotic pairs, but for those who do, here's an interesting setup.

HI guys, I have some questions to ask about hidden divergence.
CADCHF pair D1 with hidden divergence, and also a head and shoulders pattern. Based on the chart pattern theory, the head and shoulders pattern mean the trend has high possibility to reverse/rebound, and also the bias of 240MA line, i believe that the trend will reverse/ rebound. But, the hidden divergence tell me another trend, which is the trend will will continue down.

Any explanation or clarify based on my opinion? Feel free clarify to me.

Hi Jefflee,

This is an interesting case. Here's how I see it.

You are right mentioning a H&S pattern and effectively I think there is a chance that price decides to reverse to the upside despite the 38,2 Fib level and the bearish Hidden Divergence pattern. But what we see is price reaching a consolidation level after a big move, a common behavior on all markets. So it is not typical of a usual divergence pattern during a normal price cycle movement. This should be a heads up telling us something is different. and not to enter so fast at the slightest signal.

But there is nevertheless a HD pattern as price diverges from the indicator and we might decide to trade it as such. This is when a good money management is so important. I will show you the way I would have traded it if I had decided to enter.

1. In real time, I would have seen the HD pattern starting to develop at the blue vertical line on the Daily chart. This is a signal for me to check on the next lower timeframe if the MACD line crosses 0 to the down side.
2. We see such a signal at the circled red candle closing on the 4 HR chart. I then place my stop loss level at the last swing high and I bring the stop loss to break even when price reaches half the risk in profit. That's what happened so there was no loss. (I use a RR= 1:1).
3. I also use another approach I call the Trading Zone. During the time the MACD line is negative on the 4 HR timeframe (lime rectangle - the Trading Zone), I switch to the 30 min chart and trade the same way with MACD. As you can see, there were 3 entries, two of them got stopped out at breakeven and one (#2) gave around 25 pips.

This is my way of analyzing charts and entering trades. Hope it is useful for you.

Getting ready for next week. Here is a pair to watch. A Hidden Divergence pattern starting to develop on the 1 HR chart during a strong down move
and waiting for MACD to cross 0 past that trendline on the 15 min TF.

A similar situation for USDCHF on the 1 HR chart. Furthermore, a rejection candle suggesting that price is ready to go further up.

Here again, a Hidden Divergence starting to develop on the 1 HR chart. An entry signal was given by MACD crossing 0 on the 15 min chart, but it did on a bearish candle. The next one was bullish and this is when I would have entered, but the candle was closing the week. It is better to wait and see what price wil be doing at the start of next week. It would have been a good setup in the middle of the week, but I will pass on this one. There will be other opportunities for sure.

Using the Hidden Divergence pattern applied to the currency indices on the Daily timeframe, here are the potential moves for next week given that the patterns detected are still developing:

1. AUDUSD: Bearish.
2. GBPUSD: Bearish.
3. NZDUSD: Bearish.
4. USDCAD: Bullish.

Hey chamane a question. (Thanks for your posts by the way.) It's getting a bit tricky. The last three 1hr/15m charts you posted with hd on the 1hr, also have divergence on the 1hr and hidden divergence on the 15m.

Do you see this making the trade less likely to be successful?

Hi aud,

You are right, it might be looking tricky or contradictory having a bearish signal right after a bullish one. There are many answers to that and some of them depend on the way you trade divergences. I will give my personal answers with an example:

1. On the 1 HR chart, we can observe a bullish Regular Divergence (blue lines). This means that the momentum is decreasing, but it doesn't mean a trend change. Not yet. It would have to show other signs to confirm the trend change, like cross of trendlines or higher lows in price movements. But it doesn't mean you cannot trade the pattern. In my case, I would switch to the 15 min chart and wait for MACD to cross 0. It did and it gave a 20 pip profit (RR= 1:1). This is the advantage of a multiple timeframe approach. But I am convinced this is trading the retracement because the big trend is bearish, given by four aligned ribbon EMA's. So the 1 HR chart shows a bearish trend and a timeframe 10 times higher shows the same. This became one of my main criteria to check before trading HD.
2. So in our case, everything is aligned for a down movement. And the second divergence pattern that we see with the red lines is a Hidden one and that's why I am waiting for a bearish entry signal. The signal hasn't occurred yet and price could reverse and go north, we never know and we just have to wait and see. But if the bearish signal I am waiting for happens, I will enter without hesitation. Furthermore, the last candle on the 1 HR chart is a bearish hammer and the one before a bearish doji.

I think it comes down to trading what we see and just follow our rules. For me, the odds are better with Hidden Divergence patterns compared to Regular Divergence because we trade in the direction of the big picture.

A) when conflicting divergences occur, whether in multi time frames or same time frame, one can ask whether it is:
1. consolidation, or
2. retracement

B) if still in doubt, go back to basic. ie. the higher time frame trend.
how to broadly see trend?

in the example, we are comparing h1 and m15 with conflicting divergences.
so higher time frame would be h1.
possible determination of trend would be:
1. trend line - price stays below
2. macd - stays below zero line

C)
1. hd in higher time frame is very powerful simply because it flows with the trend.
2. rd in higher time frame is more difficult as it takes more time and greater effort to reverse the trend.

D) best scenario:
1. hd in higher time frame -> flows with the trend.
2. rd in lower time frame -> retracement.
3. higher time frame trend resumes.

in the example, the m15 rd could have run its course as price was rejected at the red resistance zone.

Thx @chamane for your reply! I wilL take noted the way u analyse the chart!
Here i continue with my new question and opinion.

I am a swing trader, I prefer to identify HD at daily frame and find the entry point from the h1 chart. It really a powerful strategy to earn more and more!

1. Is it HD only mostly base on macd histogram beside only? If skip one then mostly not working well.
2. If i want draw a trend line on the candlestick to check HD, which point is more suitable?

Hi Jefflee,

 

1. The MACD histogram is the indicator I like the most for detecting divergence patterns, but it is not the only one you can use. Actually, I think it is better if the pattern is detected with more than one indicator. I use many convergence signals to confirm my entries and using two oscillators having the same response is one of them. I like to validate with Stochastic, a personal preference. Besides, Stochastic was conceived to detect momentum change in price.
2. I am not sure I understand your question, but I will say that I draw the lines on what seems to be the most obvious on the chart and I use the wicks of the candle, not the body.

Waiting for entries in the Trading Zone.

gu m30 hd

weakest currency at london open

gu m30 hd was consumed at a support zone.
market offered about 30 pips but i did not take it.

gu h1 possible hd.
looking to average out cost as price is now at resistance zone and brn 1.23.

HD pattern developing on the Daily chart. Let's see how it goes.

Still in the Trading Zone, but no signal yet.

jpy weakest currency
nj h1 hd. m15 hd.
gn d1 hd. m15 double hd.

weakest currency during new york open