Tuesday, June 28, 2005
OK, been asked exactly what hidden divergence is and for those of you who dont know please have a look at the chart above.
Just right click the picture and choose 'open in new window' to make it bigger.
The indicator i used for this was the OSMA or 'moving average of ocilator - basically the histogram on a good macd. The settings are 8,12,9
The chart shows the easiest type of hidden divergence to spot and the most lucrative - there are other harder to spot ones where the lows come in the same peak so to speak but lets get the basics right first.
basically this is my definition and how to use it:
Determine the trend with some kind of moving average or whatever else you fancy - the ones above are a 34 ema and a 50 ema showing the trend as up
you will then see higher highs on price and higher highs on osma - higher lows on price and higher lows on osma.
when you see a higher low on price but which shows a lower low on osma this is hidden divergence and is used for re-entry into the prevailing trend. the trade can be exited in many ways either an osma top or a pre-determined level of support. Or you may decide to stay in the trend until some kind of regular divergence is seen.
Entry is given on the close of the first bar that makes a single higher (lower) bar on the osma. Its important that you wait for the bar to close as until it is the osma bottom is not formed.
There are ways of optimising the entry point where you can enter before osma has given the signal that its bottomed out - either by identifying some kind of support zone with pivots, murray math etc or on some other significant support such as a price channel, trendline etc.
this is the prime hidden divergence setup when above the osma zero line you get 2 or more higher highs in succession followed by a lower low. There are other forms of hidden divergence but this one is the highest probability one. If you wait all day for these and take nothing else you will make money on them overall. Hidden divergences are seen on all timeframes
Lastnights cable closed at +30 as i moved the stop up watching coronation street :)
Please let me know if this was useful or if it needs more in depth.