What is Divergence in RSI?
This is my second post on RSI – Relative Strength Index. Here I have discussed What is Divergence in RSI.
The word divergence means to deviate and to have a difference, so the divergence here is a difference from the price.
The price is telling us something else, and the RSI is showing us a difference from the price.
How does RSI create a difference from price?
I will show you some examples here, but if you have not read the first, Introductory post about RSI, What is RSI Indicator?
Now we are discussing how the RSI creates a difference from our candles, charts, and price. Here we will discuss this situation.
When it happens, we get some perfect trades in which Reversal Trades and Continuation Trades.
In the posts, I will write some valuable articles about the Types of Divergences, and so many other Initial Topics will be discussed in upcoming articles.
See the above picture, the price is coming from the top to bottom and creating Lower Highs and Lower Lows. Price reaches at support level, what we see, the price has created the Lower Low, but RSI has created the Higher Low. This is the thing to which we say Divergence.
This is the first indication that the market now intends to move to the upside, so we have to plan the buy from this level.
Now, what we will decide here, when the prices mean the Black Line in the RSI window is under the 30 Band level, we have to wait here to transfer and shift this Black Line means the market structure to above from 30 Band Red Horizontal Line.
These bands would also be discussed in the later articles in detail. There are two lines you are looking at in the above picture in the RSI window section, the Pink Line and the Black Line.
When we see and confirm that the Pink Line is shifted under the Black Line, untill or unless we will not take any buy trade. You can see previously, when the Pink Line was over the Black Line, we were looking for Sell Trades Opportunities.
I have drawn a Trend Line on the price chart as well as on the RSI Window Back Line chart at the same positions.
What do we see here?
At the beginning of the Trend Line in the RSI Window, we see the Black Line is under the 30 Band Red Line, and the Pink Line, which is 14 14-period Simple Moving Average, is also above the Black Line.
So we have to wait to create the proper Divergence. When we saw that the Divergence in the RSI window and the right side of the Trend Line is upper from the left side of the Trend Line was down.
What do we see here?
Black Line is still under the Red 30 Band Horizontal Line, we have to wait here until the Black Line must go to upside above this 30 Band Red Line, and the Pink Line must be shifted under the Black Line.
When we have got all these evidences, we can take a perfect buy trend from this level.
This Divergence is called Regular Bullish Divergence.
Now, what would be our Take Profit level?
We have to set our Take Profit up to the structure level, from when the market started selling. We can also see any Fair Value Gap or Order Block for that.
The second example is in the above picture. The market is in a Bullish Trend, it is making Higher Highs and Higher Lows from No. 1 to No. 2.
What happens here?
The Market created the last high, but the RSI did not create any higher high.
At this position, we are looking for in RSI window, the second part of divergence, which is already under the 70 Band, then we have to wait for the Pink Line to shift above the Black Line.
Where the exact point where the Pink Line was above the Black Line, we have to put our Sell trade here.
And the Take Profit level would be the Order Block where the No. 3 position Order Block is available.
Important Rule for Divergence:-
At least 14 candles or more are recommended in divergence. whether it is Regular Bullish Divergence or Regular Bearish Divergence.
Here, I have counted the candles in the above Divergence; there are 17 candles available.
So it is perfect Regular Bearish Divergence, which has given us a huge sell Opportunity here.
To check the Candle Count Method, see the picture below.
Now, I am sharing my personal RSI Settings and Colors, which I use personally.
I have not changed any length other than 14, and the Band Levels are the same as they are by default.
I have only changed some colors and line style; you can see the settings in the pictures below.
For more information, you can watch the detailed video, which is uploaded on my AKFX Academy YouTube Channel.
