Divergence Setups
Divergence is one of the trade set ups used by traders. It involves looking at a gold chart and one more indicator. For our example we shall use the MACD indicator.
To spot this trading setup find two chart points at which price makes a new swing high or a new swing low but MACD indicator doesn't, indicating a divergence between price & momentum.
To search for divergence we look for two chart points, two highs that form an M-shape on the chart or 2 lows that form a W-Shape on the chart. Then search for the same M-shape or W-shape in the indicator you use to trade.
Example of a Divergence Trade Setup:
In the chart below we identify two chart points, point A and point B (swing highs). These two points form an M-shape on the price chart.
Then using MACD indicator we check highs made by MACD, these are highs which are directly below Chart points A and B.
We then draw one line on the chart and another line on the MACD.
Drawing Divergence Gold Trading Lines
The chart above highlights example of one of the four types of divergences, the one above is known as hidden bearish divergence, one of best type to trade. Types of divergences are covered in the next tutorial.
How to spot divergence
In order to spot Gold diverging signal we check for the following:
- HH=Higher High- two highs but the last one is higher
- LH= Lower High- two highs but the last one is lower
- HL=Higher Low- two lows but the last one is higher
- LL= Lower Low- two lows but the last one is lower
First let us look at the illustrations of these terms:
M-shapes dealing with price Highs
W Shapes dealing with XAUUSD price lows
Example of M-Shapes
Examples of W Shapes
Now that you have learned the divergence terms that are used to explain set-up. Let us look at the two types of divergences & how to trade these chart setups.
The two types are:
- Classic Gold Trading Divergence
- Hidden Gold Trading Divergence
These 2 setups are described on following tutorials below
