How to Spot and Trade Bullish and Bearish Divergence Patterns

what is bullish divergence

If the MACD line is above zero, it is seen as confirming an uptrend, while if it is below zero it is believed to show a downtrend. It is important to note that if you end up missing the divergence, and the price has already changed direction, you shouldn’t rush into a position. In fact, it can be great to look at a longer timeframe and gather data on how a market behaves after a divergence before you enter a position. To start looking for a divergence, you should first see whether the price action has reached a higher high or a lower low.

what is bullish divergence

This trend is often viewed as a weaker sign compared to regular or hidden divergences, but it still offers valuable insights. It is usually used in combination with other technical patterns or indicators to provide a more robust trading signal. Although divergence is a powerful sign indicating a change in the direction of a market’s movement, it cannot be used in isolation. New traders should focus on regular divergence before incorporating hidden divergence into their trading practices.

Hidden Divergence

All you need to do is check whether the oscillator formed a high or low that doesn't correlate with the price's high/low. The Stochastic Oscillator is similar to the RSI and reflects overbought and oversold market conditions. The RSI indicator is represented by a solid line that moves up and down. The MACD indicator is a lagging indicator, which means that its signals occur late. We've talked a lot about indicators but haven't mentioned what indicators are used to identify divergence. Note that divergence may form across more than two highs, meaning divergence may persist for a long time.

As we mentioned earlier, there are some reliable indicators that you can use to identify a bullish divergence pattern. These include the following – Relative Strength Index, MACD crossover, and the Stochastic oscillator momentum indicator. When price is in an uptrend and consolidates, not making any higher highs, but the oscillator continues to make higher highs, this is hidden bullish divergence. You would be best placed to practice this forex divergence trading strategy on a demo account. A demo account provides a chance for a beginner trader to develop the ability to detect bullish and bearish patterns, as well as detect divergence setups. You can open a FREE demo trading account  in less than five minutes.

Such a situation may predict a potential bottom of the established downtrend. You can check this video by our trading analysts on how to identify and trade the bullish divergence pattern. The relative strength index (RSI) is an oscillator that is used to assess the direction of market momentum – meaning it can identify divergences and hidden divergences. However, overbought is bittrex good and oversold readings are not completely accurate indications of a reversal. The stochastic oscillator might show that the market is overbought, but the asset could remain in a strong uptrend if there is sustained buying pressure. From the above chart, we can see that the techncial indicator – in this case the stochastic oscillator – has not reached a lower low.

Becoming a Momentum Trader

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The stock pulls back, starts to trade sideways, and reaches new support of approximately $37. Asktraders is a free website that is supported by our advertising partners. As such we may earn a commision when you make a purchase after following a link from our website. Trading financial products carries a high risk to your capital, particularly when engaging in leveraged transactions such as CFDs. It is important to note that between 74-89% of retail investors lose money when trading CFDs.

This situation demonstrates that bears are losing power, and that bulls are ready to control the market again—often a bullish divergence marks the end of a downtrend. We have all the tools that we need into order put a Forex divergence trading plan together. We will axitrader review use the MACD indicator for spotting divergence and for closing trades. When we see discrepancies between price action and MACD, we will enter trades based on a divergence signal. When we see an MACD crossover in the opposite direction, we will close our trades.

  1. There are inherent challenges, such as false signals and ambiguous indicators.
  2. This is the inverse, where the lower highs of the indicator (RSI in this case) slope downwards, moving away from the upwards sloping, higher highs of the price.
  3. The price forms a bullish divergence with any indicator we mentioned above.
  4. Regardless of the trading method you use, you should always use a Stop Loss order for each of your trades.
  5. Notice how far back you would have had to look back to identify the support level.

By signing up as a member you acknowledge that we are not providing financial advice and that you are making the decision on the trades you place in the markets. We have no knowledge of the level of money you are trading with or the level of risk you are taking with each trade. When the Stochastic indicator is over 80, the market is in an overbought condition, and if the stochastic oscillator is below 20, then it would be considered oversold. When the MACD line and the price of an asset are moving in opposite directions, this is seen as a divergence, which might signal an impending change in the trend’s direction. Imagine the price of a stock is making new lows while the RSI makes higher lows with each swing in the stock price. Investors may conclude that the lower lows in the stock price are losing their downward momentum and a trend reversal may soon follow.

Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. Divergence is one of the common uses of many technical indicators, primarily the oscillators. We don’t care what your motivation is to get training in beaxy exchange review the stock market. If it’s money and wealth for material things, money to travel and build memories, or paying for your child’s education, it’s all good. We know that you’ll walk away from a stronger, more confident, and street-wise trader. Not all technical indicators have a standardized extreme range as RSI does.

Can be Hard to Spot:

In this example of a long trade, you could trail your stop loss at one or two PSAR levels back from the current candle. Now let's take a closer look at some examples of RSI divergence and how you can use it to identify potentially profitable trading opportunties. If you lack experience, consider opening a Libertex demo account. You can try live trading without any risk and gain enough experience in a safe environment.

Thus, if the indicator moves upward, it means the price should rise, as well. Divergence is considered a reliable indicator of potential price retracements, but it doesn’t necessarily signal a complete trend shift or immediate price reversal. Divergences may persist for a long time, and they don’t provide a potential price target. Because of that, traders should apply other forms of analysis to confirm signals offered by divergence.

In general, if you have a bullish strategy you want to use, you can capitalize what you know about bullish divergence patterns and find optimal times to jump into a position. One last thing to be aware of is normal price fluctuations can lead to false signals. Since bullish divergence occurs during a downtrend, it’s not uncommon to see the price just continue in the same direction, down.

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