Understanding trading patterns and timely detection of market reversal signals on candlestick charts is a foundation of efficient trading. Fortunately, the wealth of trading experience spanning decades equips us with a solid knowledge base to predict market trends. Proficient traders are able to identify a multitude of trading patterns, which assist them in making well-considered decisions, amplifying profits, and mitigating risks.
In this article, we will explore two key trading patterns: bullish divergence and hidden bullish divergence. These patterns show up frequently on charts, signaling an imminent price shift. The regular bullish divergence pattern unfolds at the downtrend end, while hidden bullish divergence occurs at the trend consolidation phase. This article will guide you on pinpointing divergence, what this pattern signifies, and more.
- What is Regular (or Classic) Bullish Divergence?
- What is Hidden Bullish Divergence?
- How to Identify a Divergence Pattern?
- How to Apply a Divergence Pattern?
- Possible Drawbacks of the Divergence Pattern
What is Regular (or Classic) Bullish Divergence?
Divergence is a technical analysis pattern signaling an impending trend reversal. Bullish divergence transpires at the end of a downtrend and indicates the forthcoming initiation of an uptrend. Bearish divergence, a mirror image of bullish divergence, occurs at the culmination of an uptrend and alerts about an impending trend shift.
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The terms "bullish" and "bearish" originate from traditional trading parlance. "Bulls" refer to investors or traders who anticipate an asset's price will ascend, hence they are "bullish" on the asset. Conversely, "Bears" are those who predict the asset's price will descend, making them "bearish".A bear market is marked by a sustained decrease in prices, while a bull market signifies the opposite.
Thus, when seasoned traders spot a bullish divergence and validate it through indicators or other market analysis tools, they begin purchasing an asset at its relatively lower price, foreseeing an upcoming price upswing. Unlike many trading patterns,, a divergence pattern is more indicative of short-term fluctuations.
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Identifying the pattern might seem intricate, but let's look at how to spot it on a graph. The divergence pattern, as its name suggests, involves a discrepancy of data. This means the price dynamics may contradict the data garnered from oscillators, such as the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD).
The bullish divergence is a candlestick pattern marked by declining lows on the price chart, coupled with the oscillator signal line showing rising lows. This pattern signals the imminent end of a downtrend and the beginning of an uptrend.
What is Hidden Bullish Divergence?
A more complex pattern is the hidden bullish divergence. Here, the oscillator displays decreasing lows while the price’s lows rise from one candle ot the next on the chart.This pattern typically occurs during consolidation periods or after price pullbacks in a bull market.
This pattern points to a short-term decline before the bullish trend resumes. In most instances, this decline is triggered by a faction of traders aiming to take profit. It doesn't incite a prolonged downturn in the asset's price.
How to Identify a Divergence Pattern?
The bullish divergence pattern occurs during a downtrend and is characterized by decreasing lows on the price chart paired with the lows on the oscillator's graph rising. If you're using an RSI oscillator, you can detect a bullish divergence through a single line passing through the price troughs. Two troughs are sufficient to form a line that signals the impending trend reversal. The MACD oscillator relies on the point where several MACD lines intersect.
To identify the hidden divergence pattern, patience is key as this pattern requires time to clearly form. To ensure that you're dealing with a hidden divergence and not a bearish pattern, it's wise to employ some confirmation tools before investing.
Hidden bullish divergence typically occurs during a consolidation phase or a short-term retracement stage in an uptrend. To avoid misinterpretation, make use of additional indicators. For example, the Fibonacci retracement indicator can confirm that you're encountering a hidden bullish divergence.
How to Apply a Divergence Pattern?
The hidden bullish divergence pattern is a frequent occurrence in the crypto market. If you decide to learn to detect it, there will be ample opportunities for practice. The ability to quickly identify the hidden divergence pattern can enhance your profitability in trading. So, how do you leverage the bullish divergence pattern?
Firstly, it's crucial to contextualize the pattern and identify the overarching trend within which the divergence pattern resides. As previously mentioned, the hidden bullish divergence pattern emerges in an uptrend, during a short-term retracement or consolidation phase. If the overall trend is bullish, then the pattern should be interpreted as a buy signal.
Conversely, if you identify signs of hidden bullish divergence in a downtrend, it's advisable to reassess your interpretation of the divergence pattern. It's likely that you're dealing with a different pattern indicating something else.
If you find yourself uncertain about interpreting the chart’s indications, it might be wise to exercise patience and allow the pattern to evolve further. Should the hidden bullish divergence pattern become clearer over time,it could serve as a potential buy signal. However, if the market behavior remains ambiguous, it is a prudent choice to set it aside and await a more favorable opportunity.
After confirming that the hidden bullish divergence pattern is in sync with a broader bullish trend, you can initiate an order. While the divergence pattern offers a robust signal about the future price direction, it doesn't pinpoint the exact moment of the trend reversal. To safeguard potential profits, employing flexible orders is advisable. In such cases, a stop-loss order is typically the optimal choice.
As soon as you identify the extreme price shift, establish a stop-loss order. Specifically concerning hidden bullish divergence, position the order just below the lowest point of the most recent price surge.
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If you're trading within 60 to 120 minute intervals, you should set a target price to take profit. A target 100% larger than the stop-loss order price could be feasible. If the overall trend proves to be bullish, be prepared for a future reversal. The classic divergence pattern can be useful in detecting the trend reversal on time.
Possible Drawbacks of the Divergence Pattern
No trading pattern is flawless, and it's essential to be aware of the limitations of each pattern you utilize. This enables you to blend their best attributes to attain the most precise market trend forecasts.
The primary drawback of classic and hidden divergence patterns lies in their complexity, particularly for hidden divergence. These patterns are well suited to seasoned traders, but novices using these patterns run the risk of making errors.
Moreover, though the pattern is easily detectable once formed, identifying the divergence pattern in real-time can be challenging. Misinterpreting bullish divergence and hidden bearish divergence can be costly.
Some traders forget that hidden divergence tends to occur closer to the end of a trend. Earnings can be lost if you don't respond promptly to significant trend changes. To prevent such mistakes, utilize a variety of indicators and patterns. Don't limit yourself to the divergence pattern.
Lastly, the divergence pattern works best with highly sought-after cryptocurrencies such as Bitcoin and Ether, and other top coins with substantial trading volume. Oscillator data for smaller tokens can potentially be misleading.
In spite of the outlined limitations, harnessing divergence patterns with precision can substantially boost profits when executed adeptly. The effort invested in mastering these patterns is undoubtedly a valuable pursuit. Take care to recognize the significant distinctions between hidden and classic divergence patterns, opt for an oscillator tool aligned with your preferences, gain practical experience through a demo account, and enhance your trading acumen with this dependable signal. It's important to note that this isn't investment advice; prior to making any investment choices, conduct thorough research consistently.