How to Trade Bitcoin Classic Bullish Divergence & Bearish Divergence
In bitcoin trading, classic divergence is used as a possible sign for a trend reversal and is used by traders when looking for an area where price could reverse and start going in the opposite direction. For this reason this cryptocurrency trading setup is used as a low risk entry method and also as an accurate way of exit out of a bitcoin trade.
This strategy is a low risk technique to sell near the top or buy near the bottom, this makes the risk on your trades are very small relative to the potential reward. However, this is one method with very many whipsaws and most traders do not recommend using it.
Divergence in Trading is also used to predict the optimum point at which to exit a trade. If you already have an open trade that is already profitable, a good way to identify a profit-taking level would be the point where you identify this bitcoin trading setup.
There are 2 types, based on the direction of the Bitcoin trend:
- Classic Bullish divergence
- Classic Bearish divergence
BTCUSD Classic Bullish Divergence
Classic bullish divergence set-up forms when price is forming lower lows ( LL ), but the oscillator is making higher lows (HL). The example illustrated below shows a picture of this bitcoin trading setup.
Crypto Classic Bullish Divergence
This examples uses MACD indicator as a Bitcoin divergence indicator.
From the above example the price made a lower low(LL) but the indicator made a higher low(HL), this shows there is a divergence between the price & indicator. This signal warns of a possible trend reversal.
Classic bullish diverging signal warns of a possible change in trend from down to up. This is because even though the price went lower the volume of sellers who pushed the price lower was less as illustrated by the MACD indicator. This indicates underlying weakness of the downwards Bitcoin trend.
Classic bearish Trading Divergence Setup
Classic bearish divergence setup occurs when price is showing a higher high ( HH ), but the oscillator is lower high (LH). The image below shows an example of the setup.
Bitcoin Trading Classic Bearish Divergence
This examples also uses MACD indicator
From the above example the price made a higher high(HH) but the indicator made a Lower High(LH), this shows there is a divergence between the price & indicator. This signal warns of a possible trend reversal.
Classic bearish diverging signal warns of a possible change in the trend from up to down. This is because even though the price went higher the volume of buyers who pushed the price higher was less as illustrated by the MACD indicator. This indicates underlying weakness of the upward trend.
In the above examples, if as a trader you had used divergence trade setup to trade you would have gotten good signals to enter or exit the trades at an optimal point. However, divergence signals just like other indicators, is also prone to whipsaws. That is why it's always good to confirm the diverging signals with other technical indicators such as the RSI, Moving Averages and Stochastic Oscillator.
A good indicator to combine classic diverging setups is the stochastic oscillator & wait for the stochastic lines to move in direction of the divergence signal so as to confirm the trading signal.
Another good technical indicator to combine with is the moving average technical indicator, in this technical indicator a trader should use the Moving Average Crossover System
Examples of Moving Average Crossover Technique Strategy
Once the divergence signal is given, a trader will then wait for the Moving average crossover system to give a signal in the same direction, if there is a classic bullish setup, a trader will wait for the moving average system to give an upward crossover signal, while for a bearish classic divergence signal the trader should wait for the Moving average cross-over system to give a downward bearish crossover trading signal.
By combining the classic divergence trading signals with other technical indicators this way, a trader will be able to avoid whipsaws when it comes to trading the classic diverging signals, because the trader will wait until the btcusd market has actually reversed and is already moving towards this direction, hence the trader will not fall into the trap of picking market tops and bottoms.
