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Have a look at the chart above and observe what happened after the RSI divergence. See, the RSI divergence is very accurate when it comes to identifying trend reversals. But the question is, How to actually catch the trend reversal, right? So what if we combined RSI divergence with other reversal factors like the Head and shoulders pattern, we can increase the probability of our trade, That is great, right?
Before thinking about trade entry, we need to have a favourable market condition. Since we are looking for a trend reversal, It is better to have a trending market. Have a look at the chart below. According to the above chart, you can see that the market was in a strong uptrend but right now the price action starts to slow down.
Have a look at the RSI divergence marked in the chart above, this indicate weaknesses of this uptrend. Now we confirmed the weakness of this uptrend. Now all the technical factors are aligned. But the question is where to place our sell orders? This is where the head and shoulders pattern marked in the chart above comes into play.
Head and shoulders pattern has reversal characteristic hence combining it with the RSI divergence is a great way to improve odds in our favours. In this case, we used the break of the neckline as our entry trigger. Have a look at the chart below to see what happened after the breakout. The second one is the descending triangle pattern which acts as a reversal pattern in an uptrend market. Now, Have a look at the descending triangle pattern marked in the forex chart below. Just like the previous example, the market was in an uptrend and eventually the price start to slow down.
At the same time, RSI also signals the divergence. These clues indicate the weaknesses of this uptrend. Now we know that the ongoing uptrend is losing momentum and result of that the price ended up forming a descending triangle pattern. This even confirms the reversal. Now it is time to execute the short trade. Just like the previous example, we used the same breakout techniques for this trade as well.
Below chart explain how the trade workout after the entry. We wait for a break below the descending the triangle and then place the sell order. As you can see pairing RSI divergence with chart patterns resulted in high profitable trades. This time we are going to pair trend structure with RSI divergence. As long as the market is trending, we need to trade in the direction of the trend. This is how professionals teach us.
But the trend is not going forever, at some point it is going to reverse, right? We all know that uptrend is forming higher high while the downtrend is forming lower lows. Now with that in mind have a look at the chart below. Now if you look to the left of this chart, you can see that it is a downtrend with a series of lows and lower highs. Price action creates Lows but the RSI create higher lows, right? What does this indicate?
Even though the market creates low the RSI is doing the opposite thing this indicates ongoing downtrend is losing its momentum and we should prepare for a reversal. Have a look at the black circle marked in the chart, What happened there? Price broke the previous Lower high and start to create the first high. This indicates that the ongoing downtrend is no longer valid.
Now all the technical factor are aligning nicely. As price broke above the previous Lower high, we execute a buy trade by placing stop-loss few pips below the structure level Geen zone. As you guys can see this trade works really well. Just like the head and shoulders pattern double top and bottom also has the reversal characteristic. After hitting that level, the price will retrace lower slightly but then return back to test the previous level again.
In the double top above you can see that two tops were formed after a strong move. Notice how the second top wan not able to break above the first top. This is a strong sign that a reversal is going to happen because it is telling buyers are struggling to continuously go higher. Because the indicator measures momentum, it may remain excessively overbought or oversold for an extended period when an asset has considerable momentum in either direction.
Thus, the RSI is most effective in an oscillating market when the asset price fluctuates between bullish and bearish swings. The main trend of the stock or asset is critical for accurately interpreting the indicator's data. The RSI would peak at 50 percent, not 70 percent, throughout a downtrend, which investors may employ to more consistently signal adverse conditions. When a strong trend is in place, many traders will draw a horizontal trendline between 30 percent and 70 percent to assist them in recognizing extremes.
Adjusting overbought or oversold levels is usually not essential when a stock or asset price is in a long-term horizontal channel. A notion connected to employing overbought or oversold levels that correspond to the trend is to concentrate on trade signals and approaches that follow the trend. In other words, by using bullish signals when the price is in a bullish trend and negative signals when the stock is in a bearish trend, one may avoid the many false alarms generated by the RSI.
What is Divergence? We will utilize it to make entry and exit choices in our swing trading strategy. It is most often seen when the indicator moves in the opposite direction of the price. Therefore, if the prices make a higher high and the indicator makes a lower high, this indicates a bearish divergence in the RSI.
Similarly, when prices make lower lows and the indicator makes higher lows, it indicates a bullish divergence in the RSI. Divergence may be either positive or negative: positive if it indicates that the price of an asset may rise, or negative if it indicates that the price will fall. A positive divergence signal arises when a technical indicator climbs higher while the underlying security's price declines. Similarly, a negative divergence signal occurs when the indicator trends lower while the price increases.
RSI Divergence: What is it? As the relative strength index of a particular stock exhibits lower highs when the price uptrend reaches higher highs, this is referred to as RSI divergence. When the price is downward, it will lower lows with deviation, while the RSI will make higher lows.
While both indicators are moving in the same direction, the RSI is deviating from the stock price. Divergence implies that the present price trend is waning, indicating when it is appropriate to buy or sell a specific stock. When an indicator deviates from the price, this lack of synchronization signals a possible chart shift. A concealed bullish divergence suggests that an uptrend is continuing. You'll observe that the RSI indicator creates a lower low than the price, which makes a higher low on the trend lines.
On the other hand, a concealed bearish divergence occurs when a stock is heading lower. This trend is expected to persist when the RSI reaches a higher high than the price's lower high. Either of these gives the knowledge necessary to make an informed stock decision. An RSI divergence indicator signal indicates this when the price movement and the RSI no longer exhibit the same momentum.
The RSI indicator suggests the magnitude of a price movement over a specific time period. The RSI oscillator is one of the most often utilized oscillators in technical analysis, and divergence is calculated by comparing it to the current price action. If a chart displays RSI divergence, the relative strength index RSI produces lower highs when the price makes a higher high or higher lows when the price makes new lower lows. When the RSI fails to break out to higher highs during an uptrend in price or fails to break down to lower lows during a trend in price, this is referred to as an RSI divergence.
A divergence between the RSI and the price movement indicates that the indicator does not agree with the price activity. A bullish divergence occurs when the RSI indicator reaches an oversold level followed by a higher low that aligns with lower lows in the price action. This may indicate increased bullish momentum; a break above an oversold level is a frequently utilized buy signal for initiating a new long position. A bearish divergence occurs when the RSI indicator reaches an overbought level followed by a lower high that aligns with the price action's higher highs.
This may indicate a loss of momentum and a possible uptrend reversal. A break below an overbought level is a frequently utilized profit taking or short selling signal for initiating a new short position. As is the case with the majority of technical indicators, the divergence between an asset's price action and the RSI Indicator is typically more dependable when it follows the pre-existing long-term trend and is measured over a longer time period.
For traders, this often means taking fewer bets in the market — but potentially higher gains if everything goes well. Additionally, since the RSI Indicator is a measure of price momentum, it may display readings indicating an asset is overbought or oversold for extended periods.
While this might be discouraging and seem to be a limiting characteristic, it also implies that divergence is an especially powerful signal when the market is swinging between bullish and bearish situations.
Finally, divergence is not a necessary or sufficient indicator of an impending price reversal, and market momentum might alter even without an accompanying divergence signal. A divergence signal indicates that a significant price change is going to occur. A common illustration of this is when a stock continues to make new lows while the RSI Indicator continues to make higher lows with each periodic swing in the asset's price.
A trader may deduce from this that the stock is losing downward momentum and that the present trend will revert to its previous orientation. This would be a bullish divergence to the upside, signaling a trader to consider initiating a long position in the asset. The RSI was developed to measure the magnitude of a price movement while also providing signals of "overbought" or "oversold" scenarios.
The typical RSI setting is 14 periods, with 70 indicating overbought and 30 indicating oversold. A cross over 70 suggests that the ticker is about to enter a correction, pullback, or trend reversal phase, and across values, less than 30 indicate that the ticker is mispriced. In a strong moving market, the RSI seldom goes below 40 and often oscillates between 50 and When the RSI reaches the 50 levels, it signals a trend shift.
This is a more significant warning than a simple reading above or below the lines since it provides an early warning. Average Price: RSI Divergence Indicator When the indicator crosses over the 50 lines, it indicates that the average purchasing price for the period is more than the average selling price. The converse is true if the 50 lines are crossed to the downside.
These line crossings might signal an excellent opportunity to initiate a trade during a pullback.
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