Divergences not only signal a potential trend reversal but can also be used as a possible sign for a trend continuation (price continues to move in its current direction). Always remember, the trend is your friend, so whenever you can get a signal that the trend will continue, then good for you! Hidden bullish divergence happens when the price makes a higher low (HL), but the oscillator shows a lower low (LL).
Hidden Bullish Divergence
This can be seen when the pair is in an UPTREND. Once the price makes a higher low (HL), see if the oscillator does the same. If it doesn’t and makes a lower low (LL), we have some hidden divergence.
Hidden Bearish Divergence
Lastly, we’ve got hidden bearish divergence. This occurs when the price makes a lower high (LH), but the oscillator makes a higher high (HH). By now, you’ve probably guessed that this occurs in a DOWNTREND. When you see a hidden bearish divergence, the pair will likely continue to shoot lower and continue the downtrend.
Remember that regular divergences are possible signals for trend reversals, while hidden divergences signal trend continuation.
Regular divergences = signal a possible trend reversal.
Hidden divergences = signal a possible trend continuation.
Trade a Divergence
It’s not 100% foolproof. Still, when used as a setup condition and combined with additional confirmation tools, your trades have a high probability of winning with relatively low risk. There are a bunch of ways to take advantage of those divergences. One way is to look at trend lines or candlestick formations to confirm whether a reversal or continuation is in order. Another way is to use momentum tricks by watching for an actual crossover or waiting for the oscillator to move out of the overbought/oversold region.
Remember that taking no position is a trading decision, and it’s better to hold on to your hard-earned cash than bleed Benjamins on a shaky trade idea. Divergences don’t appear that often, but it will behoove you to pay attention when they do appear.
Regular divergences can help you collect a lot of profit because you can get in right when the trend changes. Hidden divergences can help you ride a trade longer, resulting in bigger-than-expected profits by keeping you on the correct side of a trend.