Divergence Trading Setups Trading Gold Using Divergence Trading Setup
Divergence is one of the trade setups used by Gold traders to analyze prices of Gold and try to predict the next likely direction of these gold prices. It involves looking at the Gold price chart and one more indicator. For our example we shall use the MACD indicator.
To spot this divergence trading setup find two chart points at which price makes a new swing high or a new swing low but the MACD indicator does not, indicating there is a divergence between the price and the momentum.
To look for divergence trading setups we look for two chart points, two highs that form an M-shape on the XAUUSD price chart or two lows that form a W-Shape on the XAUUSD price chart. Then look for the same M-shape or W-Shape on the indicator that you use to trade.
Example of a Gold Price Divergence Trading Setup:
In the XAUUSD chart below we identify two chart points, point A and point B (swing highs). These two chart points form an M-shape on the price chart.
Then using the MACD indicator we check the highs made by the MACD indicator, these are the highs that are directly below Chart points A and B.
We then draw one line on the XAUUSD chart and another line on the MACD indicator as shown below.
Gold Trading - Divergence Trading Setup - Drawing Divergence Trading Lines
The XAUSUD price chart above shows an example of one of the four types of divergence trading setups, the one above is known as hidden bearish divergence, one of the best types to trade. Different types of divergence trading setups are covered in the next lesson.
How to spot divergence Trading Setup
In order to spot Gold divergence trading signal we look 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 trading terms:
M-shapes dealing with price Highs
W-Shapes dealing with price lows
These concepts above are explained below using Gold price charts and MACD indicator.
Example of M Shapes on Gold Price Charts
Example of W Shapes on Gold Price Charts
Now that you have learned the divergence trading terms that are used to explain the divergence trading setups. Let us look at the two types of divergences and how to trade these setups on Gold price charts.
There two types are of divergence trading setups:
- Classic Divergence
- Hidden Divergence
These two divergence trading setups are explained on the next tutorials.