The Relative Strength Index (RSI) is one of the more popular indicators among traders. Let’s take a look into how the RSI works and more importantly how we could use it to improve our trading results.
The RSI is basically a momentum-based oscillating indicator developed by Welles Wilder. It measures the average of the gains or losses over a specified number of candles or periods. It then plots the figures on a separate window, oscillating up and down a specific range. With the right parameters, it somehow characteristically mimics price action closely, close enough that it also shows sharp peaks and troughs. Divergence is simply a disagreement between the price action and the oscillator. You can notice this pattern when the lower lows or highs of the price chart differ with the peaks and troughs of the oscillating RSI indicator.
Divergences are usually used for finding and trading market trend reversals. That is a very powerful price action forex strategy.
In a few simple words, during uptrend divergence between price action and RSI happens when the price of a currency pair makes higher highs but the RSI indicator does not, and alternatively, during downtrend divergence between price and RSI happens when the price of a currency pair makes lower lows but the RSI indicator does not.
How To Trade With The Rsi Divergence Indicator?
Following is the method to trade with RSI DIVERGENCE INDICATOR.
Open BUY trade when the following conditions are met:
- There is a downtrend.
- The price action of your currency pair makes lower lows but the RSI divergence indicator does not.
- The indicator draws a divergence line.
- That is an early signal of a trend reversal. You can go long after a closed candle.
- You can confirm the buy trade with the help of other technical tools.
- Take profit or exit the trade at the arrival of the opposite signal.
Open SELL trade when the following conditions are met:
- There is an uptrend.
- The price action of your currency pair makes higher highs but the RSI divergence indicator does not.
- The indicator draws a divergence line.
- That is an early signal of a trend reversal. One can go short after a closed candle.
- You can confirm the sell trade with the help of other technical tools.
- Take profit or exit the trade at the arrival of the opposite signal.
