DIVERGENCE XAUUSD TRADING SETUPS SUMMARY

Classic Bearish - HH xauusd price, LH indicator - Indicates underlying weakness of a trend - Warning of a possible change in the trend from up to down.

Classic Bullish - LL xauusd price, HL indicator - Indicates underlying weakness of a trend - Warning of a possible change in the trend from down to up.

Hidden Bearish - LH xauusd price, HH indicator - Indicates underlying strength of a trend - Mainly found during corrective rallies in a downward trend.

Hidden Bullish - HL xauusd price, LL indicator - Indicates underlying strength of a trend - Occurs mainly during corrective declines in an upwards trend.

Illustrations of the divergence terms:

M-shapes dealing with price highs

M-shapes

W-shapes dealing with price lows

W-shapes

These are the shapes to look for when using these setups.

One of the best indicator for this setup is the MACD Technical Indicator - as a signal MACD divergence is a setup to enter a trade. But as with any signal there are certain precautions which have to be observed to make this signal a set-up. Getting straight in to a trade as soon as you see this setup isn't the best strategy. This setup should be used in combination with another indicator to confirm the direction of the trend. A good system to combine with is the moving average crossover system.

Be aware this setup on a smaller timeframe isn't so significant. When divergence is seen on a 15 minute chart it may or might not be very important as compared to the 4 Hour chart timeframe on MetaTrader 4 platform.

If seen on a 60 minute chart, 4H chart, or daily chart time-frame, then start looking for other factors to indicate when the price might react to the divergence.

This brings us to a key point when using this signal to enter a trade: on a higher time frame MACD divergence can be a fairly reliable indicator of a change in price direction. However, the big question is: WHEN? That is why getting straight in to a trade as soon as you see this xauusd set up is not always the best strategy.

Many investors get caught out by entering the market too soon when they see MACD divergence. In many cases, xauusd price has still got some momentum to continue in the current direction. The investor who has jumped in too soon can only stare at screen in dismay as price shoots through his stop loss taking him out.

If you simply look for this setup without any other considerations you will not be aligning yourself with the best odds, so to increase the odds of making a successful trade you should also look at other factors, specifically other indicators.

What other factors should you consider when using this Gold trading setup?

1. Support level, Resistance levels and Gold Trading Fib levels on higher Gold Chart Time-Frames

Another way to greatly increase the odds of a winning trade is to observe higher chart time frames before opening an order based on the lower timeframes.

If you observe that the hourly, 4 hour or daily chart has met a major resistance, support or Fibonacci level then the probability of a successful trade based on divergence on a lower timeframe at this point increases.

2. Reward to Risk Ratio: Gold Trading Money Management Guidelines

And finally, when looking for divergence, it is very important that you enter the trade correctly, so that you have a good risk/reward ratio and only open trade transactions that have more profit potential than what you're risking. If you understand how to enter a transaction properly, you can measure your risk/reward before you open a transaction. That way, you can only select to open orders that offer a favorable ratio.

Finally, when used correctly & combined with other indicators to confirm this signal, divergence setup can offer huge profit potential.