How to Trade the Bullish Divergence Pattern

Traders can spot divergencies based on the relative strength index , a momentum indicator used in technical analysis. A triple divergence only occurs where a divergence has given an incorrect signal. Instead of reversing direction, price has made a new, higher High (in an up-trend) or lower Low (in a down-trend). If the indicator repeats its signal by making another lower High (in an up-trend) or higher Low (in a down-trend), this is an even stronger signal than the original divergence. StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider.

  • 74% of retail client accounts lose money when trading CFDs, with this investment provider.
  • The occurrence of the divergence setup should alert the trader towards seizing the initiative for necessary trade action.
  • There are a lot of traders and many of them use divergence in their own way.
  • After a bearish divergence, price usually makes a rapid bearish move.
  • A trendline drawn along the indicator valleys must slope upward.

Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.

Most importantly, it is a pattern or an occurrence that comes naturally and you’ll likely encounter this situation quite often. In the chart above, the price experienced change in momentum after the divergence. After that, the price broke the lower resistance level but rebounded from the upper one, and continued the downward movement.

Many indicators tend to imitate the peaks and troughs on the price chart with a series of similar highs and lows. Divergence occurs when the indicator fails to imitate the pattern on the price chart, a sign of trend weakness and likely reversal. Divergence can indicate that the market has lost momentum and a slow down or reversal is coming. Most stop-loss orders placed using other forms of technical analysis. For instance, short-term traders may use a set percentage stop-loss whereas swing or position traders may look at longer-term trend lines or Fibonacci levels.

Volatility Indicators

This doesn’t mean an immediate buy, but consider taking a position soon, especially if you receive other confirming signals. As with many chart patterns and concepts, divergences must be noted about their time frames. In other words, it can be easy to miss the bigger picture while being too focused on the present. Below, we are going to see examples of each one of the indicators combined with the bullish divergence pattern. Even though it is one of the most complicated patterns in technical analysis, it is also an extremely useful pattern that offers traders lots of trading opportunities.

bullish divergence

Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. When the MACD line and the price of an asset are moving in opposite directions, this is seen as a divergence, which might signal an impending change in the trend’s direction. To start looking for a divergence, Technical Analysis & Charting 2020 you should first see whether the price action has reached a higher high or a lower low. It is helpful to draw lines on your price chart in order to see whether this has happened. For example, in the below price chart, we can see that the price has reached a lower low. Aside from the regular divergence, the second popular type of divergence is the hidden one.

Moving Average Systems

So, while the price action is still bearish, the weekly RSI reading suggests that a bullish trend reversal could be close. The Stochastic Oscillator shows the movement of the closing price relative to its high-low range, over a set period. One line tracks the closing price while another, smoothed line represents a moving average of the relative close. It may be helpful to draw a straight line on your chart connecting the peaks to see if a significant slope appears. You may also check for hidden divergence if you notice a higher low or lower high in the price chart.

bullish divergence

When we see discrepancies between price action and MACD, we will enter trades based on a divergence signal. When we see an MACD crossover in the opposite direction, we will close our trades. You should always have strict take profit rules when trading divergence. For all the positives of trading most volatile currency pairs divergences, one of the things that divergence trading does not offer us, are clear targets. Therefore, an additional tool should be used in order to select your profit targets. Typically, If you trade divergence with RSI or Stochastic, you may need an additional indicator to close your trades.

Trendlines in Technical Analysis: A Complete Guide

The signal of the upcoming price movement appears from this divergence. Class B divergences occur when prices experience a double bottom and an oscillator reaches a higher low than it reached during its previous decline. Let’s take a look at how to screen for and trade bullish divergences and boost your trading performance. This information has been prepared by IG, a trading name of IG Markets Limited. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information.

Class A bullish divergences are often the best signals of an impending sharp rally. We already mentioned that the indicator hints at the upcoming market direction. Although the indicator forms higher highs and a trader may consider it a sign of upward movement, the market sees an opposite trend, and retracement will likely occur.

bullish divergence

Always do your own careful due diligence and research before making any trading decisions. Stay on top of upcoming market-moving events with our customisable economic calendar. Discover why so many clients choose us, and svsfx what makes us a world-leading provider of CFDs. Discover the range of markets and learn how they work – with IG Academy’s online course. This website is using a security service to protect itself from online attacks.

Bullish Divergence Pattern MACD (Moving Average Convergence Divergence)

As far as the divergence setup goes, one way to place your stop loss would be put it right above the last top on the chart, which confirms the bearish divergence. If the divergence is bullish, then we rely on bottoms and the stop should be placed below the last bottom on the chart. You can use candlestick and reversal chart patterns or support levels as confirmation.

Get your daily dose of crypto and trading info

Oscillators are most useful and issue their most valid trading signals when their readings diverge from prices. A bullish divergence occurs when prices fall to a new low while an oscillator fails to reach a new low. This situation demonstrates that bears are losing power, and that bulls are ready to control the market again—often a bullish divergence marks the end of a downtrend. We first start by spotting a bullish divergence between the MACD and the price action.

As we use confirmation from only one indicator, we should think about placing a Stop Loss order below the price’s last low. Any of the divergence types can be found when applying the RSI indicator. Libertex MetaTrader 5 trading Xcritical Overview platform The latest version of MetaTrader. Research & market reviews Get trading insights from our analytical reports and premium market reviews. Add a parameter for price where the closing price decreased over the period.

In this article, we will analyze divergences as a category and the different types of divergences – their characteristics and what they indicate. Moreover, we’ll give you some useful information on how traders actually use divergences. In both cases, as the price climbed toward its peak, the RSI posted a downward pattern, indicating a market reversal – or bearish divergence. Price divergence – bearish and bullish – in the crypto space can sometimes determine future price direction. HowToTrade.com helps traders of all levels learn how to trade the financial markets. When the Stochastic indicator is over 80, the market is in an overbought condition, and if the stochastic oscillator is below 20, then it would be considered oversold.

No matter your experience level, download our free trading guides and develop your skills. Barclay Palmer is a creative executive with 10+ years of creating or managing premium programming and brands/businesses across various platforms.

Deepen your knowledge of technical analysis indicators and hone your skills as a trader. A stochastic oscillator is used by technical analysts to gauge momentum based on an asset’s price history. The Relative Strength Index is a momentum indicator that measures the magnitude of recent price changes to analyze overbought or oversold conditions. We do not know how far prices are likely to go once they reverse, so in many cases, we have to utilize other techniques to exit our divergence trade setups.