Hidden Bullish Divergence Forex Trading Examples (With Entries & Exits)

If you’ve traded divergence before, then you know how this trading method can produce high probability trade when used the right way.

However, many traders get confused when trading it.

And as a result, they identify the wrong divergence signals and trade it wrongly.

When it comes to divergence, there is Regular Divergence and Hidden Divergence.

Most traders know how to trade Regular Divergence because it’s the easiest to spot on the charts.

But not many traders are aware of how to trade Hidden Divergence.

In this post, I’m going to get into the details of how to trade the Hidden Bullish Divergence…

And I’m going walk you through three different trades that I took using it.

This way you will get an inside look into how I identify the Hidden Bullish Divergence and how I trade it.

But before I get into the trading examples, we need to first establish…

What is Hidden Bullish Divergence?

When it comes to trading divergence, there are generally two types of divergence:

• Regular Divergence
• Hidden Divergence

Regular Divergence is typically used to trade reversal patterns like Double Tops & Double Bottoms, and Higher Highs & Lower Lows.

Whereas Hidden Divergence is typically used to trade pullbacks in a trend.

When the market is in a downtrend, the market will form Lower Lows and Lower Highs.

These Lower Highs are the pullbacks in a downtrend.

And when the market is in an uptrend, the market will form Higher Highs and Higher Lows.

These Higher Lows are the pullbacks in an uptrend.

What Hidden Divergence does is to identify the pullbacks that are most likely to work out.

That means to identify high probability pullback trades.

And what we will be focusing on in this post is to identify the high probability pullback trades in an uptrend using Hidden Bullish Divergence.

So a Hidden Bullish Divergence occurs when the market is in an uptrend forming Higher Lows…

But the indicator is showing a Lower Low.

Which Indicator to Use?

There are a few indicators that can identify divergence.

Some of the more commonly used ones are:

• Relative Strength Index Indicator (RSI)
• Stochastic Oscillator
• Moving Average Convergence Divergence (MACD)
• On-Balance Volume (OBV)

While they all can produce similar signals, the indicator that I like to use to trade divergence is the Stochastic Oscillator.

That’s because the Stochastic Oscillator has a smoother signal line and thus create clearer divergence signals.

For example, this is how divergence on the RSI Indicator looks like:

The red arrows in the chart above show where the divergence has occurred.

As you can see, the RSI Indicator produces rather jagged lines.

Here is how divergence on the Stochastic Oscillator looks like:

As you can see in the chart above, the Stochastic Oscillator produces a much smoother line than the RSI Indicator.

While many traders have no problems using the RSI Indicator, my preference is to use the Stochastic Oscillator.

With that said, there is no “better” indicator to identify divergence.

They all produce similar signals.

So it comes down to which indicator you feel most comfortable with.

For our purpose, we will be using the Stochastic Oscillator for the rest of this post.

How to Identify Hidden Bullish Divergence

When there is no Hidden Bullish Divergence in the market, the Stochastic Oscillator will mimic the wave pattern of the market.

That means when the market is forming Higher Lows, the Stochastic Oscillator will also form Higher Lows.

But when a Hidden Bullish Divergence occurs, the Stochastic Oscillator will deviate from the wave pattern of the market.

That means when the market is forming Higher Lows, the Stochastic Oscillator will instead form a Lower Low.

The diagram above shows the difference when there is no divergence and when there is a divergence.

You want to really take note of the difference so that you can identify it on your charts when you trade.

Now, the diagram above is when the market is in an uptrend.

That means it’s forming Higher Highs and Higher Lows.

However, a Hidden Bullish Divergence can also occur when the market is in a downtrend.

And it occurs when the market forms a Higher Low in a downtrend, but the Stochastic Oscillator is showing a Lower Low.

In the diagram above, you can see that the market is in a downtrend forming a Lower Low and Lower High.

Then the market started to form a Higher Low, but the Stochastic Oscillator is showing a Lower Low.

This is also a Hidden Bullish Divergence.

Though this occurrence is rare, when it occurs it can be a high probability trade.

Now that you know how to spot a Hidden Bullish Divergence, let’s get into the specific trading setup to trade it.

Hidden Bullish Divergence Trading Setups

There are two trading setups for Hidden Bullish Divergence.

One in an uptrend, and the other in a downtrend.

For both setups, I’ve added two Exponential Moving Averages – the 20 EMA and 50 EMA.

The two EMAs will help set the trading criteria.

Here’s what we are looking for in an uptrend:

Here are the entry rules to trade a Hidden Bullish Divergence in an uptrend:

1. For an uptrend, we want the 20 EMA to be above the 50 EMA and for the market to trade above the 20 EMA.
2. Once the market has started trading above the 20 EMA, we are looking for the market to make a pullback to the EMAs to form a Higher Low. In the pullback, I’m looking for the market to close below the 20 EMA.
3. Then we want the market to close above the 20 EMA. Once the market closes above the 20 EMA forming the Higher Low, we want to see if there is a Hidden Bullish Divergence on the Stochastic Oscillator. If the Stochastic Oscillator is showing a Lower Low, there is a Hidden Bullish Divergence and that is our signal to go Long.
4. To go Long, either enter at the close of the candlestick bar above the 20 EMA, or place a Buy Limit Order below the close for a better entry.
5. Place Stop Loss below the Higher Low and place the Take Profit level at 2R. Once the market reaches close to our Take Profit level, move the Stop Loss to breakeven.

Here’s what we are looking for in a downtrend:

Here are the entry rules to trade a Hidden Bullish Divergence in a downtrend:

1. For a downtrend, we want to see that the 20 EMA is below the 50 EMA, and the market is trading below the 20 EMA.
2. Then we want to wait for the market to form a Higher Low.
3. When the Higher Low is formed, take a look at the Stochastic Oscillator to see if there’s Hidden Bullish Divergence. If the Stochastic Oscillator is showing a Lower Low, there is Hidden Bullish Divergence.
4. Then wait for the market to close above the 20 EMA. Once it closes above the 20 EMA, that is our signal to go Long.
5. To go Long, either enter at the close of the candlestick bar above the 20 EMA, or place a Buy Limit Order below the close for a better entry.
6. Place Stop Loss below the Higher Low and place the Take Profit level at 2R. Once the market reaches close to our Take Profit level, move the Stop Loss to breakeven.

Now that you know the entry rules, let’s get into 3 trading examples.

For each of the trade, I will walk you through what I see on the charts…

My thought process on entering into the trade…

And how the trades eventually turned out.

Trading Example #1: USDJPY

This trading example is on the USDJPY 1-hour chart.

This chart above is a trading example of a Hidden Bullish Divergence in an uptrend.

1. From the left-hand side of the chart, you can see that the market just transitioned from a downtrend into an uptrend. And the 20 EMA just crossed over the 50 EMA. Although the market dipped slightly below both EMAs after that, it went back up and traded above the 20 EMA.
2. The market then finally did a pullback to below the 20 EMA.
3. Then in one bar, it closes back above the 20 EMA again forming our Higher Low. At that point, the Stochastic Oscillator was showing a clear Hidden Bullish Divergence as it formed a Lower Low. That is my signal to go Long.
4. Since the market closed very near where the 20 EMA was, I chose to place a Buy Limit Order at the nearest 5-pip interval level at 108.95.
5. Then I placed my Stop Loss below the low of the Higher Low at 108.80. This gave me a Stop Loss distance of 15 pips. I then placed my Take Profit level at 2R, which is 30 pips away from my Buy Limit Order at 109.25.

This is how it looked like on the chart:

Here’s the outcome of the trade:

After I placed my Buy Limit Order, I got filled in the next bar.

The market then started to consolidate for a little bit before going up to hit my Take Profit level at 109.25.

As you can see, the market continued to go up after that.

So why not place my Take Profit level at 3R or even 4R?

That’s the trap of hindsight.

That means that it’s easy to see where you should place your Take Profit level AFTER the move has occurred.

But we don’t have a crystal ball.

Based on my testing, I’m perfectly happy with just 2R because I still get a positive expectancy in the long run.

Ultimately, it comes down to your trading style and testing to see which works best for you.

Trading Example #2: AUDJPY

This trading example is on the AUDJPY 1-hour chart.

This chart above is a trading example of a Hidden Bullish Divergence in a downtrend.

1. In this chart, you can see that the market has transitioned from an uptrend into a downtrend as the 20 EMA crosses below the 50 EMA.
2. As the market traded lower, it formed a Higher Low.
3. At that point, I saw that the Stochastic Oscillator is showing a Lower Low for a valid Hidden Bullish Divergence.
4. The market then closed above the 20 EMA confirming the formation of the Higher Low. This is my signal to go Long.
5. Since the close above the 20 EMA is very close to the 20 EMA, I decided to place a Buy Limit Order just 5 pips below the close of the candlestick at 73.35.
6. Then I placed my Stop Loss below the low of the Higher Low at 73.10. This gave me a Stop Loss distance of 25 pips. My Take Profit level is then placed at 2R, which is 50 pips above my entry at 73.85.

Here’s how I placed my orders on the chart:

Here’s the outcome of the trade:

As you can see, after I placed my Buy Limit Order, I got filled three candlestick bars later.

After I got filled, the market immediately reversed and went up to hit my Take Profit level at 2R.

I had initially planned to place my Buy Limit Order at 73.30 but finally decided against that.

Had I placed my order at 73.30, I wouldn’t be able to get filled.

There have been several times where the market didn’t come down to my Buy Limit Order and went back up.

But this time, it just filled me before heading back up.

Trading Example #3:

This trading example is on the NZDUSD 1-hour chart.

This chart above is a trading example of a Hidden Bullish Divergence in an uptrend.

1. From the left-hand side of the chart, you can see that the market just transitioned from a downtrend into an uptrend. And the 20 EMA just crossed over the 50 EMA.
2. The market then did a pullback to below the 20 EMA. However, it did not form a Higher Low. Instead, it went down to the same level as the previous swing low. At that point, the Stochastic Oscillator is already clearly showing a Lower Low.
3. The market then closed above the 20 EMA. At this point, this isn’t considered a valid Hidden Bullish Divergence because the market did not form a Higher Low. Now, while this isn’t our trade setup, I decided I wanted to get into a trade because I saw a Bullish Pin Bar formed at the 50 EMA. This indicated to me that the 50 EMA was holding up as a dynamic resistance level. Furthermore, it bounced off the support level at the previous swing low and the Stochastic Oscillator was showing a very distinct Lower Low. So, I decided to give this trade a go.
4. Since the market closed at 0.6640 above the 20 EMA, I decided to place my Buy Limit Order below it at 0.6335.
5. Then I placed my Stop Loss below the Bullish Pin Bar at 0.6620. This gave me a Stop Loss distance of 15 pips. I then placed my Take Profit level at 2R, which is at 0.6665.

This is how it looked like on the chart:

Here’s how the trade turned out:

While the market did go up about 15 pips after I got filled on my Buy Limit Order, the market eventually went down to hit my Stop Loss.

So should I have taken this trade?

Most probably not because this wasn’t a valid Hidden Bullish Divergence.

The market did not form a Higher Low and hence this wasn’t a valid trade.

So as you can see, following the rules is very important.

If it’s not part of your trading plan, don’t trade it.

Conclusion

Now that you know what the Hidden Bullish Divergence is and how to trade it…

Go open your charts now and see if you can spot them and trade them.

Start off with either a demo account or a small live trading account trading only 1 Micro Lot (0.01 Lot).

Once you are consistently profitable trading it, then you can start to gradually increase your trading size over time.

Now I’d like to hear from you…

Do you trade the Hidden Bullish Divergence?

Let me know in the comments below.

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