Divergence Trade Strategy (5) Why hidden divergence implies continuation of trend?


This is the fifth article about divergence trade strategy, and this is the last article.

Divergence Trade Strategy (1) Difference between Regular Divergence and Hidden Divergence
Hidden divergence implies trend continuation, and Regular divergence implies trend reversal. The most important difference from viewpoint of trade strategy is that Regular divergence is used for counter trend, and Hidden divergence is used for trend follow.

Divergence Trade Strategy (2) How to avoid fake of divergence
How should we avoid the "fake" of divergence? We should Judge high probability to win by not only the occurrence of divergence but also other factors. Also, we should watch whether to exceed last high or fall below last low and pay attention to the price action until just before the entry.

Divergence Trade Strategy (3) Why we delay being aware of occurrence of divergence?
If we don't predict and wait for divergence, we will delay being aware of occurrence of divergence. Both regular divergence or hidden divergence, we analyze charts and indicators that are likely to occur divergence and create scenarios and wait.

Divergence Trade Strategy (4) How to cut loss when you enter due to occurrence of divergence
If we judge the scenario was wrong after entry, we have to make loss cut as suitable level. Normally the loss cut line where the price exceeds previous high or fall below previous low. If price exceed previous high or fall below previous low, it is highly likely that the divergence itself has been denied, that is, the scenario that we drew has been denied. Therefore, it does not make sense to hold the positions anymore.

In this article, I would like to write why hidden divergence implies continuing trends?

I use divergence for my daily trading, but hidden divergence is clearly easier to use than regular divergence. The reason is that it is based in trend follow, and entry point is “buy on dips” or “sell on rallies” while the trend continues. Mr. Cardwell, who first advocated the hidden divergence (reversal), is amazing!

So, why hidden implies a continuation of the trend?

Why hidden divergence implies continuation of trend?

Why does hidden divergence suggest a continuing trend?

Taking RSI as an example, the formula for calculating RSI is as follows.
RSI = Ratio of rising and falling widths in the last certain period

RSIs at two different timing are calculated at different periods.

On occurrence of hidden divergence on an uptrend which connects two points (Lower Low and High Low) is affected by;
“The strong momentum of the early stage of uptrend that is included in the formula of the oscillator at the Lower Low, but is not included (by the passage of time) in the formula of the oscillator at the Higher Low”

The value of the oscillator, which shows the market momentum, is similar to the engine speed.
While increasing the car speed, engine speed decreases once each time a gear is changed from a low speed gear to a high speed gear, and then increases again. However, increase of engine speed is smaller than increase of car speed.
The point where the car speed is the highest is where the engine of the high-speed gear begins to decrease.

In the market where many people participate, something like moment of inertia similar to automobiles is working,

  • Hidden divergence means that when the chart starts to rise, the market will accelerate again with the addition of less power.
  • Regular divergence means that when the chart rises to the maximum, the power of the market is not the highest point but the peak of a little weak place.
With this, I would like to finish the five articles about divergence trade strategy.
(Although I may add it again.)