#7. Divergence trading
What is RSI divergence? Simply put, divergence is when price and RSI go in two different directions. Specifically, we have 4 types of RSI divergence.
1. Bullish Divergence – Bullish divergence
Bullish divergence is when price creates a lower low but RSI creates a higher low.
When RSI bullish divergence occurs, we can expect a bullish market reversal.
For example: You can see in the following chart. A Bullish divergence occurs when the price of the XAUUSD pair makes a new lower low while the RSI makes a new higher low. At that point, we can expect a bullish reversal in XAUUSD.
2. Bearish Divergence – Bearish Divergence
Bearish Divergence is when price makes a higher high but RSI makes a lower high.
When RSI bearish divergence occurs, we can expect a bearish reversal of the market.
For example, look at the chart below.
The XAUUSD pair made a new higher high on the H4 chart while the RSI made a lower high. After that, XAUUSD had a bearish reversal.
3. Bullish Hidden Divergence – Bullish Hidden Divergence
Bullish Hidden Divergence is when price makes higher lows while RSI makes lower lows.
In this case, we wait for a bullish continuation of the trend.
See the following example:
Hint: In case of bullish hidden divergence, you can take the difference between the 2 bottoms as the take profit target (or use Fibonacci Extension to determine the target).
4. Bearish hidden divergence – Bearish hidden divergence
Bearish hidden divergence is when price makes a lower high while RSI makes a higher high.
In this case, we wait for a bearish continuation of the trend.
Consider the following example: The EURUSD pair in a downtrend continues to make lower highs, while the RSI makes higher highs.
That is when the Bearish hidden divergence signal appears and we expect a bearish continuation of the trend.
In this example, RSI is in the OVERBUY zone, further reinforcing the bearish hidden divergence signal => Price then continued to decline.
Summary of RSI indicator
So Kienthuctrade has completed a detailed article about the RSI indicator. In this article, you have understood the meaning and nature of the RSI indicator as well as methods to use this indicator effectively.
However, there is no guarantee that these methods that work for me will also work for you, so there is no other way but to experience and practice a lot to find the right trading methods for yourself.
You need to remember that, for all technical analysis tools in general and the RSI indicator in particular, you must clearly understand their nature in order to use them most effectively.
Thank you all for reading. Subscribe, and give me a like to motivate me to share knowledge. #binance $ETH #btc
