Divergences are best when picking tops and bottoms and areas where the price can stop and reverse. There are two types of divergences, namely: regular and hidden. We are going to talk about the latter one.
As we have mentioned, divergences help traders know where the price can stop and reverse — this is what a regular divergence does. On the other hand, hidden divergences can give signals for trend continuation where the price continues to move in the same direction it is in right now. This provides the trader with an opportunity to ride the trend as long as it is possible. Hidden divergences may be bearish and bullish.
Hidden bullish divergence
Hidden and bullish divergence is composed of a price that makes a higher low and an oscillator that creates a lower low. This occasion is always prevalent on uptrends. If you want to find out whether there is a hidden divergence, look at the oscillator if it also makes a higher low like what the price is doing. If it does not, it means that there is a hidden divergence.
Hidden bearish divergence
Hidden and bearish divergence is made up of a price that makes a lower high and an oscillator that produces a higher high. As its name suggests, these occurrences usually happen when there is a downtrend. Hidden bearish divergences tell us that the pair will most likely continue to decline, and the downtrend will have a continuation.
Now, let us cite some examples when trading regular divergences.
For instance, we have a EUR/ SUD daily chart, and it has been on a downtrend. Some indicators are giving us signals that it is most likely that the downtrend will end soon. The price creates a lower low, but the indicator is saying higher low. We can say that this might be a good time to buy because of the divergence between the indicator and the price. There was a breakthrough in the falling trend line resulting in a new uptrend.
Moral of the example: stay alert for reversal clues to know that the trend should end soon.
An example when trading with hidden divergences
Let us say that we have a EUR/ SUD daily chart, and it has been on a downtrend. The price produced a lower high, but the oscillator made a higher high. If we review what we talked about earlier, we can say that this is a hidden bearish divergence. It is your discretion whether you will go to the trend or wait for a while. Later on, the trend continued. Assuming that you spotted the divergence and knew that the trend would continue to decline, you surely are going home with that hefty profit.
Are hidden divergences relevant?
Of course, they are relevant, especially if you are a trader who loves to ride trends. Sure, they can give you a hard time spotting them, but when you do, it can help you ride the trend as early as possible so you can go home with profits and gains.