How to Trade the Bullish Divergence Pattern

The stochastic oscillator compares the most recent closing price to previous closing prices in a given period. From the above chart, we can see that the techncial indicator – in this what is a brokerage account and how do i open one 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.

At the same time, in the RSI indicator window, the line remained in the market equilibrium area. This is a false price movement divergence, which is the last among consecutive divergences. The BTCUSD chart above shows a bearish trend and an increase in the RSI technical indicator curve. The blue lines drawn along the minimums of the indicator and the price chart differ in direction, that is, a sign of divergence.

For example, the price of an asset may be making lower lows, while the indicator is making higher lows. This divergence can be an indication that the momentum of the price trend is slowing down, and a potential reversal may be on the horizon. Financial market technical analysis employs tools such as chart patterns, indicators, and trendlines to determine the best buying and selling… Trading divergences lead to less overall losses and a higher chance for increased profitability. The main difference between a bullish divergence and a bearish divergence is the direction of the price movement. If the price is moving up, the divergence would be a bearish divergence.

  1. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading.
  2. The MACD collects data from different moving averages to help traders identify possible opportunities around support and resistance levels.
  3. To identify a bullish divergence pattern, a prolonged trend and the formation of a double bottom pattern are required.
  4. The Bullish Bears team focuses on keeping things as simple as possible in our online trading courses and chat rooms.

In the above RSI divergence chart example, the second Bitcoin rally failed to make a higher high on the RSI, creating a regular bearish divergence. The inflationary macro environment proved to be too bearish for the top cryptocurrency to continue its bullish trend and a strong retracement followed. Using the Margex platform, below we have provided examples of how to find bearish and bullish divergences, both hidden and regular.

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These include the following – Relative Strength Index, MACD crossover, and the Stochastic oscillator momentum indicator. When this happens, a bullish signal is generated and you buy the asset at the lows with the expectation that the price will reverse. Technical traders will often regard an overbought or oversold signal as stronger if it is accompanied by a divergence.

Please ensure you understand how this product works and whether you can afford to take the high risk of losing money. Each day our team does live streaming where we focus on real-time group mentoring, coaching, and stock training. We teach day trading stocks, options or futures, as well as swing trading. If you forgot, momentum traders seek stocks that are moving significantly in one direction with high volume. These traders attempt to ride the momentum train – or roller coaster to the desired profit. When trading divergence, you can always use Stop Loss and put it above the last top on the chart, which confirms bearish divergence.

Finally, another technical indicator that helps in identifying the bullish divergence pattern is the Stochastic Oscillator. Similar to the RSI, the stochastic oscillator signals overbought and oversold areas and shows traders the strength of the current momentum and trend. A divergence is often seen as a sign that the current market action is losing its momentum and weakening, meaning it could soon change direction. When a divergence is spotted, there is a significant chance of a price retracement. However, one of the most common problems with divergences is ‘false positives’, which is when the divergence occurs but there is no reversal.

Best Market Trend Technical Indicators

It looks at the momentum of an asset in order to identify whether a trend will move up, down or continue. We want to clarify that IG International does not have an official Line account at this time. We have not established any official presence on Line messaging platform. Therefore, any accounts claiming to represent IG International on Line are unauthorized and should be considered as fake.

Similarly, if a bearish divergence is identified, a trader may enter a short position, anticipating a potential bearish reversal. However, it is important to use the proper risk management and to have a plan in place in case the trade does not go as expected. One strategy is to enter a trade based on the divergence signal. For example, if a bullish divergence is identified, a trader may enter a long position, anticipating a potential bullish reversal. This suggests that momentum is shifting and a bullish reversal may be on the horizon. Bearish divergences occur when the price of an asset makes a higher high while the corresponding technical indicator makes a lower high.

RSI indicator divergence is among the easiest to read and decipher as a trader and will be used in the examples below. A regular divergence – also called a classic divergence – signals a possible end to a downtrend or an uptrend and is a reversal setup. Based on the trend direction, divergences are divided into bullish and bearish. According to their structure, signals, and method of definition, divergences can be classical, hidden, and extended. At the same time, it would be a big mistake to base a trading strategy solely on divergence. At the same time, divergence signals can qualitatively improve trading, increase forecasting accuracy, and reduce the backlog.

How To Identify Regular And Hidden Divergence Patterns

A hidden divergence is used in a similar way to a confirmation pattern. Bullish and bearish divergences occur when there is a discrepancy between a technical indicator and the market price. There are numerous tools that can be used to identify divergences – discover what they are and how to use them. Bullish divergence occurs when the price is creating lower lows, but the momentum indicator is showing higher lows, indicating a weakening of the trend and a potential reversal. Oscillators are most useful and issue their most valid trading signals when their readings diverge from prices.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money. 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. The moving average convergence divergence, more commonly known as MACD, is a moving average-based tool.

Bullish divergences occur when the price of an asset makes a lower low while the corresponding technical indicator makes a higher low. 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.

This figure indicates that signals for a trend reversal are false, that is, a continuation of the downward price movement. First, in order to identify and confirm the bullish divergence pattern, you need to know how to use technical indicators like RSI, Stochastic, and MACD. These are essentially momentum indicators that help traders determine the strength or weakness of a trend of the specified asset. Class A bearish divergences occur when prices rise to a new high but the oscillator can only muster a high that is lower than exhibited on a previous rally. Class A bearish divergences often signal a sharp and significant reversal toward a downtrend. Class A bullish divergences occur when prices reach a new low but an oscillator reaches a higher bottom than it reached during its previous decline.

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