Hidden Bullish Divergence and Other Divergence Signals in Trading: The Complete Guide

Understanding Divergence: Signs of Conflict in the Market

In the world of technical analysis, Divergence is a phenomenon where the indicator does not support the price movement. This conflict does not mean that the analytical tools have failed, but rather signals that the market conditions may change.

When the price moves in one direction but the momentum measured by the indicator does not show strength in the same direction, it indicates that the current trend may be weakening. Divergence is a structure with four main types, each with different meanings for understanding market trends.

Regular Divergence (Regular Divergence) and Trend Reversal

Regular Divergence is an indicator where the price makes new highs or lows, but the indicator does not confirm the trend expansion. When this occurs, it often precedes a significant reversal.

Bullish Divergence: A hopeful signal indicating a bounce back

When the price shows continued decline and creates Lower Lows, but the indicator does not create new lows, this suggests weakness in the downtrend. The next phase is likely a strong rebound. This trading approach requires waiting until the candlestick reverses above the existing resistance.

Bearish Divergence: A warning sign of a downward release

Conversely, when the price continuously makes Higher Highs but the indicator does not reflect this, it shows that the bullish momentum is waning, and a significant correction may be imminent.

Hidden Bullish Divergence and Hidden Divergence: Confirming Continuation

Unlike regular divergence, Hidden Divergence does not indicate a reversal but confirms that the current trend will continue. Hidden Bullish Divergence involves the same gentle price movements but with momentum showing strength.

Hidden Bullish Divergence: When the price slightly declines but the indicator remains strong

This occurs when the price makes Higher Lows but declines mildly, while RSI or MACD still shows weakening movement. (Lower Lows) signals that “no worries, the uptrend will return.” Traders who understand Hidden Bullish Divergence can leverage these oscillations to go long at better prices.

Hidden Bearish Divergence: Downward movement but trend continues

When the price makes Lower Highs but the indicator still shows higher highs, it indicates that the decline will be short-lived, and the downtrend will continue.

Main Indicators Used to Detect Divergence

MACD: Trend Momentum Indicator

This indicator uses two moving averages to determine direction and strength. When MACD moves positive and rises above the Signal Line, it indicates strong bullish momentum, whereas negative values suggest bearish momentum. Divergence occurs when the price makes new highs or lows, but MACD does not follow suit.

RSI: Overbought/Oversold Estimator

This indicator measures overbought and oversold conditions on a scale of 0-100. RSI above 70 indicates overbought, below 30 indicates oversold. Divergence detection with RSI occurs when the price makes a new high but RSI does not, or the price makes a new low but RSI does not.

Williams %R: Short-term Tension

Similar to RSI, this measures overbought and oversold levels using %R values below -80 (overbought) and above -20 (oversold). Divergence signals in this indicator are often reliable for predicting trend changes.

Practical Divergence Trading Strategies

How to Use Regular Divergence for Reversal

1. Look for weakening price patterns, such as Double Tops in an uptrend or Double Bottoms in a downtrend.
2. Confirm that the indicator does not move in the same direction, especially when entering overbought or oversold zones.
3. Wait for confirmation of reversal, such as breaking below resistance in an uptrend or breaking above support in a downtrend.
4. Enter a position when a clear reversal candlestick appears, and set a Stop Loss at the previous level.

How to Use Hidden Bullish Divergence Effectively

1. Detect situations where the price swings gently upward, especially Higher Lows.
2. Confirm that the indicator still suggests continuation, e.g., RSI remains within normal ranges.
3. When the price breaks above the previous swing high, go long.
4. Set Stop Loss at the lowest point of the latest swing.

Real Market Examples of Divergence Trading

Regular Bullish Divergence Formation

Imagine a market steadily declining, creating Lower Lows, while RSI enters the Oversold zone (green rectangle). When the price continues downward but RSI does not make new lows, it serves as a warning that the price is likely to bounce back. When the candlestick turns green and breaks above RSI’s 30 level, it’s a good signal to go long expecting a strong rebound.

Regular Bearish Divergence Warning

A market that has risen significantly, with prices making Higher Highs, but indicators like MACD start to decline and form Lower Highs while prices still make Higher Highs. This divergence suggests the bullish trend is losing momentum. When the price breaks below a key support level, it signals a short entry expecting a larger correction.

Hidden Bullish Divergence in Short-term Trading

In a downtrend, the price shows signs of mild recovery, forming Higher Lows repeatedly, but RSI or Stochastic still shows declining momentum. (Lower Lows) This indicates Hidden Bullish Divergence, suggesting that despite apparent weakness, the downward momentum is waning. When the price breaks above the recent swing resistance, enter long with a favorable risk/reward ratio.

Warnings and Precautions

Divergence is not a “fire and forget” signal but indicates potential. This tool can give multiple signals before a reversal or continuation actually occurs. It is crucial for traders to combine divergence signals with other analysis tools such as support/resistance zones, candlestick patterns, and trading volume.

Another key point: do not set stop-loss solely based on divergence. Always implement clear risk management. If you are a beginner, consider practicing on a demo account to understand all signals before trading live.

Summary of Divergence Signals

Divergence is a valuable tool for traders aiming to forecast market behavior. If traders can distinguish between Regular Divergence (indicating reversal) and Hidden Divergence, including Hidden Bullish Divergence (indicating continuation), and apply them alongside strict risk management, they will have a powerful advantage in trading stocks or commodities markets.