Therefore, it is necessary to confirm divergences using other trading instruments and market reaction. A classic bearish divergence appears on a bullish trend before a downward reversal. It is easy to identify at the moment when the oscillator highs do not update following the price. After the formation of a bearish divergence, wait for a confirmation signal and only then open a short trade. The purple and orange lines highlight the usual bearish divergences plotted on the price chart. However, using Bollinger Bands, you can find that the price has moved beyond the upper line into the oversold zone.

• Typically, traders look for an opportunity to buy after spotting regular bullish divergence, aiming to benefit from the expected upward movement.
• Yes, bullish divergence can be used in most types of markets, including stocks, forex, and commodities.
• The image below will show you how to trade divergence with the RSI indicator.
• So, traders can potentially use the divergence pattern to enter and exit trades.

Spot Bullish Divergence using Advance-Decline Line (AD)

It usually occurs during price consolidation or corrections and can be used as a continuation pattern or signal. As you can see, the price managed to reverse for the following two weeks after printing a regular bullish divergence. However, we did mention that a divergence by itself isn’t considered an entry signal, you need other confluences to support the idea of a reversal. Note that in this section, we’ll specifically showcase a regular bullish divergence example. For hidden bullish divergences, please check out our full guide as it warrants its own piece and breakdown of corresponding strategies.

Which indicator is best to trade with a Bullish Divergence?

There are other oscillators too that can be used to determine divergence, but RSI is the best because of the following few characteristics. IG International Limited is licensed to conduct investment business and digital bitstamp review asset business by the Bermuda Monetary Authority. The image below will give you an idea of where to put your stop loss when trading divergence. The image below will show you how to trade divergence with the RSI indicator.

Therefore, when prices are making higher highs or higher lows, the oscillator tends to mimic the same pattern. Conversely, when prices are making lower highs and lower lows, the oscillators tend to print the corresponding lower highs and lower lows. When trading bullish divergence, the most common entry points are when the market closes with the first green candle and after the breakout of the resistance level.

For Traders

From the above chart, we can see that the techncial indicator – in this case the stochastic oscillator – has not reached a lower low. This means that there is a bullish divergence, as the downward momentum is weakening and could soon reverse upward. A divergence is what happens when the price of an asset is moving in the opposite direction to a momentum indicator or oscillator. It is the opposite of a confirmation signal, which is when the indicator and price are moving in the same direction. We have all the tools that we need into order put a Forex divergence trading plan together. We will use the MACD indicator for spotting divergence and for closing trades.

Time Frame to Analyze the Bullish Divergence

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. If there is a reading over 80, the market would be considered overbought, and if the stochastic oscillator is below 20, it would be considered oversold. If there is a discrepancy between what is shown on the oscillator, and what is shown on the price chart, this is a divergence. We first start by spotting a bullish divergence between the MACD and the price action. The chart shows lower bottoms, while the bottoms on the MACD are increasing. Suddenly, after creating its third higher bottom, the MACD lines make a bullish crossover.

Throughout these pages, tales from economic milestones—such as the 2008 housing bubble—will display how collective behaviour can create booms that soon turn into busts. Our journey will weave together wisdom from finance, psychology, and beyond, inspiring a measured approach to investing that emphasises timing and caution. Below, we are going to see examples of each one of the indicators combined with the bullish divergence pattern. Divergence is a universal trend reversal and continuation signal that works on any time frame. It is relevant for crypto assets, currency pairs, stocks, and other trading instruments. To identify a bullish divergence pattern, a prolonged trend and the formation of a 4 take profit exit strategies to make you a better trader double bottom pattern are required.

• Loss aversion, for instance, can cause an investor to cling to losing positions, hoping they will rebound, rather than cutting losses early.
• When it’s below 20, it suggests the asset is oversold, hinting at a possible bullish reversal.
• Most traders use Stochastic oscillators and RSI as their technical indicators to spot divergence signals because both are the leading indicator.
• As both divergences look for “disagreement” between the technical indicator you are using and the price action itself.

The RSI indicator just contains one line, moving between oversold and overbought areas. Unlike MACD, the RSI indicator has a leading character, so it can be used as an excellent indicator to spot divergence signals. Stochastic oscillators have more dynamic character than other technical indicators, so it can give more divergence signals than the others. Stochastic oscillators are the most suitable technical indicator to spot a divergence signal. You can find the difference between the price direction with the tops or bottoms stochastic.

What is a hidden bullish divergence pattern?

Traditionally, an RSI reading above 70 indicates that a security is overbought, suggesting that it may be overvalued and due for a price correction or pullback. Conversely, an RSI reading below 30 suggests that a security is oversold, indicating it may be undervalued and poised for a potential upward reversal. For example, let’s assume that a trader decided to analyze hidden divergence using Stochastic and MACD, after spotting it with RSI. 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.

Once you have connected two or more bottoms with a line, you can use a preferred indicator to see whether a price action differs from your technical analysis tool. In most cases, traders use momentum oscillators, while the relative strength index (RSI) could be the most popular choice. In turn, traders predominantly use higher time frames to uncover potential divergences. These types of mistakes can happen with essentially any form of technical analysis. However, it is important to note that the MACD is not a perfect indicator, and it can produce unreliable trading signals. The MACD is considered a lagging indicator, because moving averages are based off of historical data.

However, since the signals can be more frequent, many of them might be false signals which need to be filtered out. 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. In the above example, we can see $XRP #Ripple on the 12-hour chart from back in July of 2019, with the price making a lower high while the RSI made a higher high. Before we get started, it’s important to first understand what divergence is and how we can use it in our day trading strategies. In this guide, we’re going to cover everything you need to know about divergence, including what it is, the different types and how to spot & use them effectively.

They can also be confirmed by identifying other divergences at higher and lower timeframes. Bearish divergences indicate an upcoming price decline, while bullish divergences indicate its growth. Bollinger Bands are trend indicators that show candle readings and meanings the direction of price and the strength of market trends. It consists of a moving average and standard deviations that form a price channel. Thus, to determine divergence, the extreme points of the price chart and the indicator of the same time order and the same type are always used.

However, indicators often follow the price when others show divergence, providing contradictory information. In these cases, traders may use other methods of market analysis to assess further price movements. Unlike previous types, hidden bullish divergence forms during the uptrend and indicates its potential continuation.