Bullish divergence will be marked by the formation of the lowest position. This time we will learn about the differences, how to recognize, tips for trading bullish divergence and others. But, before that, read other articles such as How to Read Bullish Stocks and What are the Characteristics.

What is Bullish Divergence

A price chart showing Bullish Divergence is characterized by the formation of increasingly lower lows by the price candles while the signal line of the oscillator forms increasingly higher lows. It does not matter whether it is an RSI Bullish Divergence signal or a MACD Bullish Divergence signal: the principle of spotting and trading Divergence is the same. The only difference is that the RSI Bullish Divergence signal uses the price pool formed by a single signal line to detect Divergence.

The MACD Bullish Divergence signal uses the crossover point between the MACD lines in the indicator window as the reference signal from the oscillator. Furthermore, the RSI Bullish Divergence signal uses a special setting on the RSI signal line known as a failure swing . The Bullish Divergence setup using the RSI and MACD indicators is shown below.




The RSI Bullish Divergence setup shows two pools in the RSI indicator window forming higher lows while price is showing lower lows. The RSI, therefore, is leading the price action and pointing in a new direction. Price follows suit after correcting the Divergence in the direction of the indicator signal.

What is Bullish Divergence Stochastic

There are many technical indicators that traders use, and among the most common is the Stochastic Oscillator. There are several trading methods that involve this indicator, including using it to spot Divergence. Spotting Divergence can alert you to potential trend reversals, and highlight underlying strengths or weaknesses that may not be readily apparent on a price chart.

Pertama, mari kita lihat apa itu Stochastic Oscillator, dan bagaimana komposisinya, jadi ketika Anda berdagang dengannya, Anda akan tahu apa yang dikatakannya kepada Anda. Kemudian kita akan mempelajari Divergence dan bagaimana menggunakannya. Saya juga akan menyentuh dua strategi perdagangan stokastik populer lainnya, overbought/oversold dan cross-over . Osilator Stokastik Cukup seteguk, tetapi konsepnya cukup sederhana. Indikator bergerak antara 0 dan 100 dan mencerminkan di mana harga aset relatif terhadap kerangka waktu tertentu.

If the indicator is close to 0, the price is very close to the low of the time frame you are viewing. If the indicator is close to 100, the price is very close to the high of the time frame you are viewing. This indicator is quite customizable, as it has three main variables that you need to choose from, as well as some additional options depending on the charting platform you are using.




The chart above shows what you can expect (or something similar) when you add the Stochastic Oscillator bullish divergence to your chart. %K is the number of time periods you want to use in the calculation. If you are using a 1 minute chart to trade, you may want to set it to 5 or 7, and therefore the indicator will be based on the last 5 or 7 minutes respectively.

The above has been set to 5. “Slow Down” allows you to smooth out the fluctuations in the %K. Set it to 1 and your %K line on the indicator will jump back and forth rapidly. Set it to 3 and it will rotate at a slower pace. Which you choose will depend on how active a trader you are. The above has been set to 3. %D is a moving average of the %K. This again smooths out the %K line a bit.

%D is usually displayed as a dotted line, which traces the %K line on the indicator. In the chart above, 3 has been selected for this variable. Therefore, %D will be a 3-period moving average of the %K. The Price field allows you to choose which price to use in the stochastic calculation. In the example above High/Low has been selected to capture all price data in the bar. Alternatively, you can choose to use the closing price.

The final option is to choose the type of moving average (MA) you will use. Using a simple moving average is the most common method, but you can also choose between exponential, smoothed, or weighted moving averages. Different averages respond in their own ways to price movements, and therefore, some knowledge of moving averages will help in determining which one to use. Stick with the Simple MA if you are unsure which one to use.




The Difference Now that the stochastic is set, you can start looking for Divergence. Divergence occurs when the indicator does not move in the same direction as the price. For example, the price makes a new high, but the stochastic fails to reach a new high. Or, the price makes a new low, but the stochastic fails to make a new low. The first is a case of bearish Divergence, as it indicates potential weakness, and the latter is a case of Bullish Stochastic Divergence as it shows potential strength.

When Divergence occurs, it should alert you to a potential change in price direction. However, Divergence is not a timing indicator; it may take some time for a reversal to occur after a Divergence. Therefore, do not trade on Divergence alone. When you have a bearish Divergence, wait for price to break lower before going short/buy a put. The chart above shows price making a new high, but the stochastics are not – a bearish Divergence indicating a reversal is imminent, and it is.

How to Recognize the Bullish Divergence Stochastic Pattern

The stochastic oscillator is defined as a momentum indicator that compares an asset's closing price to a set of its prices over a specified period of time. This indicator is used to generate overbought and oversold trading signals, utilizing a range of values ​​limited to 0-100. A reading above 80 generates a buy signal while a reading below 20 issues a bearish signal.



In the example above we see a different situation compared to the MACD Bullish Divergence. While price is making new highs, the stochastic value is decreasing, thus diverging from the price action. As outlined below, a bearish signal is generated as the bears are ready to take control again. Again, compared to the MACD, the price action is finally starting to follow the stochastic and move lower in the coming days. This pattern is very common even though the previous price was bullish.

Difference Between Bullish and Bearish Divergence

Here are the differences between bullish and bearish divergence. The differences are:

What is Bullish Divergence?

Bullish Stochastic Divergence occurs when price makes lower lows but the indicator makes higher lows, signaling that the downtrend is about to reverse or at least slow down to a sideways, range-bound pattern. Using the stochastic indicator.

What is Bearish Divergence?

Bearish divergence occurs during an uptrend when price makes higher highs but the indicator makes lower highs. This divergence signals that price is likely to turn bearish and start to fall or at least turn sideways.

Trading Tips

 

Since Divergence occurs before the price reversal they predict, traders can use Divergence as a leading indicator. Divergence can give you a hint that a reversal is imminent or that a move is about to end. Bearish Divergence may be a signal to close your position before it falls back down on itself, or at least set a stop loss to protect your profits.
 

Meanwhile, Bullish Stochastic Divergence shows traders possible entry points before price starts to rise. Recognizing Divergence can help you sell high and buy low. The best part? Almost any leading indicator can be used, as long as you know how to recognize Divergence. To start looking for Divergence, you first need to see if price action has made a higher high or a lower low. It can be helpful to draw a line on your price chart to see if this has happened. For example, in the price chart below, we can see that price has made a lower low.



Once you’ve connected the two bottoms with a line, you can use your chosen indicator to see if the price action is diverging from your technical analysis tool. The only parts of your technical indicator you really need to focus on here are the tops and bottoms, just like your price chart – so it’s helpful to draw trendlines on your indicator as well.

 

 



From the chart above, we can see that the technical indicator – in this case the stochastic oscillator – has not yet reached a lower low. This means that there is a Bullish Stochastic Divergence, as the downward momentum is weakening and could soon reverse to the upside. It is important to note that if you end up missing the Divergence, and the price has already changed direction, you should not rush into a position. In fact, it would be a good idea to look at a longer timeframe and gather data on how the market behaves after the Divergence before you enter a position.



The figure shows a bullish divergence between the RSI indicator and the price movement (purple line). The RSI is increasing, but the price is clearly falling. This means that even if the price falls, the market mood will improve. Here are some points to recognize the Bullish Divergence pattern on the crypto asset chart.

  1. Having a chart with only two variables to contend with is a critical component in recognizing Divergence. It is possible to detect it using indicators such as the Relative Strength Index (RSI).

  2. Pay special attention when the RSI shows a trend reversal, such as moving from a downtrend to an uptrend.

  3. Divergence, such as a market high following a market top, should be on your radar once you have identified the correct area on the chart.

  4. Recognizing different price actions that may cause Divergence is important for traders.

The Benefits of Using Bullish Divergence

The main advantage of using Divergence as a trading signal for how to time a trade entry is that it gives a signal before the price trend changes. This early signal gives traders a better entry price for their trades. After learning about bullish divergence, then trade your assets as the tips explained above. Also, register to be able to enjoy the GIC feature!