August 17, 2023

RSI Price Divergence Trading Strategy

By equrve
RSI Divergence Trading Strategy

RSI Price Divergence is one of the widely spoken about but seldom used strategy. Though it is a very powerful Setup.

This method is more of a setup and the entries and exits needs to be defined separately. As we all know RSI is a momentum indicator. So when RSI Diverges with price movement, it indicates that momentum is getting weaker in the direction of the price movement and can therefore result in a reversal.

Here is another RSI trading strategy that uses RSI as a trend following momentum indicator

For this setup what we need to look for a short setup is:

Instrument is making higher highs but the RSI is not or is infact making lower highs

For the long setup:

We need to reverse that and look for Instrument making lower lows but RSI indicator making highs.

RSI Trading Strategy for reversals

RSI Divergence Strategy is an excellent tool for finding reversals, since they show you what is lacking in an upmove or downmove. While we can do reversal strategies with Divergence in multiple indicators, my favorite one is RSI Divergence Strategy, because in RSI is momentum. And when looking for reversals what we should look for first is fall in momentum towards the direction.

While the setup is excellent, without proper Risk management and entry and exits, all setups can fail. And failure can lead to loses. But if you are looking at creating a system, this is as good a setup as any.

Entries can be many, some examples:

  1. On break of previous swing low for short, and swing high for long
  2. Wait for three consecutive red candles for short and vice versa for long.

You can checkout an excellent method of Risk management with position sizing here

Ive shown some examples of RSI Divergence Strategy in this view below, feel free to check it out. And do subscribe to the youtube channelif you like this content and want to be tuned in for more such content.