RSI (Relative Strength Index) is a technical analysis indicator used to evaluate overbought or oversold conditions of a financial instrument. Positive and negative divergences refer to the observed differences in the RSI compared to price movements.
Positive Divergence: Positive divergence is a situation where the RSI is slowly increasing in a situation where the prices of an asset are trending downward. This indicates that the asset's downtrend has weakened and a possible uptrend may begin. Example: Look at the chart below. As the price is falling, the RSI is starting to rise. New HH(High hill) is doing. It's kind of an inverse ratio. While the price is falling, the RSI starts to rise.
Negative Divergence: Negative divergence is a situation where the RSI slowly declines while the prices of an asset are trending upward. This indicates that the asset's uptrend is weakening and a possible downtrend may begin. Example: Let's look at the image below. The price is increasing. But RSI is making new Lower Lows. This indicates that the trend will change. Of course, it cannot be an indicator on its own. Again, it is an inverse proportion.
Positive and negative divergences are used to generate trading signals by tracking such differences between price movements and the RSI. However, the accuracy of these signals is not always guaranteed and should be used in conjunction with other technical analysis tools. Additionally, the time frame and market conditions should also be taken into account.
