In the last thread, we discussed the basics of divergence. In this thread, we are going to learn about the positive divergence a.k.a Bullish divergence. I'll cover it in 3 parts: 1. What is bullish divergence? 2. Types of bullish divergence 3. Subtypes with illustrations
So, let's move ahead! What is Bullish divergence? A bullish divergence occurs when prices fall to a new low while the oscillator fails to reach a new low. It indicates that the selling pressure is decreasing and the bulls may soon control the market. Generally, a bullish divergence occurs at the end of a downtrend.
Bullish divergence is mainly of 2 types: 1. Classic bullish divergence – In this case, the price and the oscillator always either forms a lower low or an equal low. Considering these cases, the classic divergence consists of 3 subtypes. The classic divergence occurs at the end of a bearish trend and indicates that a trend reversal may occur soon.
2. Hidden bullish divergence – In this, the price forms a higher low, but the oscillator forms a lower low. Hidden divergence occurs during the correction phase of a trend and is a possible sign for a trend continuation.
So, combining all the above cases, there are only 4 types of Bullish divergence. You don’t have to memorize the names, it’s just a waste of time. Try to understand the underlying logic.
1. Strong Bullish Divergence.
The price makes a lower low but the oscillator makes a higher low. This means that the sellers are not selling at the same momentum i.e. the selling momentum is decreasing.
Price: Lower Low(LL) Oscillator: Higher Low(HL)
2. Medium Bullish Divergence
The price makes a double bottom, almost the same level as the previous low and the oscillator makes a higher low. This indicates that at the same price levels, the momentum is increasing.
Price: Equal Low(EL) Oscillator: Higher Low(HL)
3. Weak Bullish Divergence
In a weak bullish divergence, the price makes a lower low but the oscillator has almost the same low levels. This means, even though the price is decreasing, the momentum is intact.
Price: Lower Low(LL) Oscillator: Equal Low(EL)
4. Hidden Bullish Divergence
The hidden bullish divergence occurs at less frequency as compared to the other types. In this, the price forms a higher low, but the momentum oscillator forms a lower low. This indicates that even at a decreasing momentum, there is enough buying going on to push the price up.
Price: Higher Low(HL) Oscillator: Lower Low(LL)
Pro Tip: 1. For bullish divergence, we only look at the LOWS. 2. Don’t memorize the cases. Just understand that if the divergence is occurring at the lows, then the price will reverse in the opposite direction i.e. it will go up. Hence, you just have to spot the divergence, regardless of the name.
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Hey John , thanks for this !
Do we use only RSI or Can I use Volumes as oscillators ?
johntradingwick
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@kshivakmr, Hi. We can use any momentum oscillator but in my opinion, the best practice is to use RSI because every other retailer is using it and so it will be easier to align with others.