The meaning of RSI divergences in trading

The search for RSI vs. price divergences is a winning trading strategy for both professional traders and traders who are starting to study the markets and technical analysis. In fact, online trading allows everyone to improve their skills to create trading strategies that adapt to changes in the Forex, indices, stocks or commodities markets.

Among the best trading techniques that I have always appreciated are divergences as foreseen by technical analysis in trading.

The meaning of divergences between indicators and prices in trading is very simple and focuses the trader’s attention in particular moments in which an indicator (or oscillator such as the RSI) reacts in advance to the price trend, giving us the possibility to evaluate the probability of a market direction change well in advance.

Divergences are said to be bullish when they anticipate a possible upward movement in prices, whereas they are defined as bearish in the opposite case.


The Best RSI Divergence indicator in trading

The divergences between indicators and price are normally studied with the Stochastic, RSI and CCI indicators. We are talking about searching for divergences between prices and momentum indicators.

In my opinion, we cannot define one indicator as better than another for the search of divergences, because there are different contexts to be evaluated such as:

  • the reference market (commodities, shares, indices or Forex)
  • timeframe used to study the divergences
XMAvaTrade
pepperstoneMarkets

The RSI divergences on Forex and indices

Personally, I really love studying the divergences between the RSI and prices, and I invite you to view the video below that we recorded during the trading course with the XM broker.

RSI and price divergences can be studied on all underlyings such as Forex, commodities, stocks or indices. For example, during the video we analyzed – on H4 timeframes – the divergences found on USDJPY and on Oil, managing to identify the moment of the rise with good precision.

price rsi divergencesWe have also simulated some trades in order to make you understand how to react over time by setting up proper risk management.

The divergences between RSI and Forex price

When a divergence occurs between the RSI and the prices of a Forex pair, it is good to remember that the reaction of the trend may not be immediate. So we advise you to follow the following rules:

  • set a stop loss just below the Low (or above the High) of the candle that made the divergence
  • study a risk/reward ratio of at least 1:2 (for money management, we invite you to read here: https://www.we-trading.eu/money-management )
  • set an even stop loss (break-even) upon reaching the risk/reward ratio of 1:1

RSI overbought (or oversold) divergences

MetaTrader divergences trading

In order to study divergences on the Forex charts, it is necessary to use a good technical and graphic analysis software such as the MetaTrader 4 platform. We recommend that you install an MT4 platform to start your studies.

Intraday Scalping trading with RSI and price divergences

The same price-rsi divergence technique can be used on H1 or M15 charts to search for intraday or scalping opportunities. The trader in this case must achieve a Risk Reward of 1: 3 to be able to maintain a constant phase of gain in the markets.

Here are some recent October 2020 chart examples in H1 on EURUSD, GOLD and DAX.

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