Hidden divergence vs regular divergence – what’s the difference? Either type of divergence can provide a powerful edge with the right trading strategy. In this article, I’m going to show you the difference between hidden divergence and regular divergence.
I’m also going to show you how these two types of divergence should be used, and I’ll give you some tips on trading hidden divergence. Keep reading to learn how to increase your odds of taking winning trend continuation trades.
Hidden Divergence vs Regular Divergence
Hidden divergence is a sign of trend continuation, while regular divergence is a sign of trend reversal. The idea is that regular divergence shows momentum leaving the trend, which could be an early sign of a reversal. Hidden divergence shows momentum coming into the current trend, which makes a continuation more likely.
The charts below show examples of both hidden divergence and regular divergence. I’ve marked the bullish divergence in green and the bearish divergence in red.
In the chart above, you can see some examples of regular MACD divergence. Regular divergence is measured off of the lows of price and the indicator during a downtrend, and off of the highs of price and the indicator during an uptrend.
Starting from the left, price made lower lows while the MACD line made a double bottom. Next, price made a double top while the histogram made lower highs. Finally, price made three consecutive higher highs while the histogram made three consecutive lower highs.
In the chart above, you can see some examples of hidden MACD divergence. Hidden divergence is measured off of the lows of price and the indicator during an uptrend, and off of the highs of price and the indicator during a downtrend (the opposite of regular divergence).
Starting from the left, price made higher lows while the histogram made lower lows. Next, price made higher lows while the histogram made a double bottom. These are both examples of bullish hidden divergence.
Note: Spotting hidden divergence can be tricky when you first start out, and doing it on the MACD histogram can be even more tricky.
With regular divergence, the signals on the histogram are usually more obvious, because they are almost always well above or below the center (zero) line.
The confusion comes when a divergence signal crosses the center line (see the image above). In my experience, it helps to ignore the center line completely.
Try to picture the top of the histogram as a single, unbroken line when it’s above zero, and do the same with the bottom of the histogram when it’s below zero.
Tips for Trading Hidden Divergence
One technique that can greatly increase your success rate with divergence trading is combining your various divergence patterns with other entry triggers. For the sake of this article, we’ll be using candlestick patterns in combination with hidden divergence.
In the previous chart (above), you’ll notice that I’ve highlighted two candlestick patterns. The first was a bullish engulfing candlestick pattern, and the second was a morning star candlestick pattern. Both of those signals could have helped you time your entry off of those two hidden divergence patterns.
In the chart above, you can see an example of bearish hidden stochastic divergence. Price made a lower high while the stochastic oscillator made a higher high. Remember that, for hidden divergence, we measure off of the highs of price and the indicator in a downtrend.
Notice: I drew the hidden divergence off of the highs in price and where those highs corresponded on the stochastic oscillator. I only considered a new high to be forming after the stochastic had crossed below the 50 line (not visible on this chart) and then crossed back above it.
After this hidden divergence pattern occurred, a bearish engulfing candlestick pattern also occurred. This strong bearish signal could have helped you get the best entry with this setup. Do you see how the candlestick pattern strengthens the case for the hidden divergence pattern and vice versa?
In the chart above, you can see an example of bearish hidden RSI divergence. Price made a lower high while the RSI made a higher high. A bearish engulfing pattern formed at the second high, confirming our hidden divergence pattern.
Note: This was not a very good bearish engulfing pattern to take, because the engulfing candle did not close in the lower 1/3rd of its rage, which is slightly bullish.
To learn more about how to trade candlestick signals, check out my free price action trading course.
The candlestick signal that I highlighted above was not the first candlestick signal to occur at the lower high. However, if you had correctly placed your stop loss above the highest point in the cycle, this trade would have worked out anyway.
The difference between hidden divergence and regular divergence is that hidden divergence is drawn off of the highs of price and the indicator in a downtrend. Similarly, it’s drawn off of the lows of price and the indicator in an uptrend. This is the opposite of regular divergence.
Hidden divergence also signals a possible trend continuation. Regular divergence signals a possible trend reversal. Both can be powerful entry signals when combined with other profitable trading strategies.
So… hidden divergence vs regular divergence? Which do you prefer to trade? Let me know in the comments below. In my own experience, I’ve found regular divergence to be more useful, but I use both hidden and regular divergence on a regular basis.