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RSI Indicator Divergence Trading Setups

Divergence is one of the trade setups used by Forex traders. It involves looking at a chart and one more indicator. For our example we shall use the RSI indicator.

 

To spot this setup find two chart points at which price makes a new swing high or a new swing low but the RSI indicator does not, indicating a divergence between price and momentum.

 

Example:

In the chart below we identify two chart points, point A and point B (swing highs)

 

Then using RSI indicator we check the highs made by the Indicator, these are the highs that are directly below Chart points A and B.

 

We then draw one line on the chart and another line on the RSI indicator.

RSI Indicator Divergence Trading Setups

RSI Divergence Trading Setup

 

How to spot divergence

In order to spot this setup we look for the following:

HH=Higher High- two highs but the last one is higher

LH= Lower High- two highs but the last one is lower

HL=Higher Low- two lows but the last one is higher

LL= Lower Low- two lows but the last one is lower

First let us look at the illustrations of these terms

Divergence Trading Types

Divergence Trading Terms

 

Divergence Trading Terms

Divergence Trading Terms

 

There are two types of divergence:

  1. Classic
  2. Hidden

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