How to trade RSI divergence - Trading Strategy 1.0

TargetSignal | May 03, 2018
How to trade RSI divergence - Trading Strategy 1.0

What is divergence? You surely can find multiple articles, comments and even definition on AtoZForex Glossary.

Traders talk about different types of divergences but they also often fail to understand these technical trade signals, thus ending up making more losses than wins. So in this session we will look into how to trade RSI divergence as a strategy that will give you reliable signals.

We believe in simplicity, thus this strategy itself is also quite simple strategy, which is based on just one SMA and RSI or even RMI.

So what is a divergence?

In short divergence is a technical term often used in technical analysis on different indicators or oscillators. Divergence occurs when the price makes a higher high, while your select indicator or oscillator makes a lower high or the other way around.

Let me explain you why it is important for you to understand divergences.

Simply, we use indicators and price action to define the trend so that we can follow it, at the end trend is your friend. However, if our indicator / oscillator gives a different signal than the price action, that basically would serve as a warning shot to you as a trader that something is happening and you need to be cautious. However that divergence warning would not be enough by itself for you to call a reversal or continuation.

Classic Divergence Classic Divergence

Although, you would find people trying to apply divergences pretty much on every technical instrument including MACD, RSI, Momentum and all the other indicators you can think of, based on experience we could say that most of these "divergences" will end up giving you a wrong signal which will lead you to make more of a loss than a profit making entry. Thus, you have to be cautious on what instrument you apply which strategy and even more what your trading strategy is made of. Hence, RSI as the name indicates is likely to give a better signal overall compared as it would signal the strength of the trend, but that would be a lagging indicator. Hence, if it is combined with a leading indicator and defining the rules we will be generating a winning simple strategy that you can trade easily.

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