RSI Divergence

Notes:

These indicators and concepts are specifically designed for TradingView.com

Overview

RSI divergence is a technical analysis tool that is based on the divergence between the price action and the RSI indicator.

How to Trade in General

There are two types of RSI divergence: bullish divergence and bearish divergence.

Bullish Divergence:Bullish divergence occurs when the price is making lower lows while the RSI is making higher lows. This indicates that the price may be losing momentum to the downside, while the RSI is gaining momentum to the upside. This can be a sign of a potential trend reversal or a trend continuation to the upside.

To trade using bullish divergence, you can follow the steps below:

1. Identify a downtrend: Look for a market that is in a downtrend.
2. Look for bullish divergence: Look for a bullish divergence signal on the RSI indicator. This occurs when the RSI is making higher lows while the price is making lower lows.
3. Enter a long position: If you see a bullish divergence signal, you can enter a long position.
4. Place a stop-loss order: Place a stop-loss order below the recent swing low.
5. Take profit: You can take profit at a predetermined target level or trail your stop-loss order to lock in profits.

Bearish Divergence:Bearish divergence occurs when the price is making higher highs while the RSI is making lower highs. This indicates that the price may be losing momentum to the upside, while the RSI is losing momentum to the downside. This can be a sign of a potential trend reversal or a trend continuation to the downside.

To trade using bearish divergence, you can follow the steps below:

1. Identify an uptrend: Look for a market that is in an uptrend.
2. Look for bearish divergence: Look for a bearish divergence signal on the RSI indicator. This occurs when the RSI is making lower highs while the price is making higher highs.
3. Enter a short position: If you see a bearish divergence signal, you can enter a short position.
4. Place a stop-loss order: Place a stop-loss order above the recent swing high.
5. Take profit: You can take profit at a predetermined target level or trail your stop-loss order to lock in profits.

RSI Divergence Shown at green line. (Price is decreasing while the RSI is increasing. 2nd red line at the RSI isn't divergence as price is rising but RSI is flat)

How to Trade the Indicator

The RSI Divergence indicator plots a green or red line that highlights where there is a bullish or bearish divergence. The higher the line the stronger the divergence. We can look for possible long positions as RSi divergence turns green and possible exits or shorts when the indicator turns red.

RSI Divergence Indicator

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