RSI Indicator Divergence Analysis - Divergence Forex Trading Explanation

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

To spot this Divergence Analysis 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 & 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 technical indicator, these are highs that are directly below Chart points A & B.

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

RSI Divergence Trading Setup - Divergence Analysis

How to spot divergence setups

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

HH=Higher High- 2 highs but the last one is higher

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

HL=Higher Low- 2 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 Terms - Divergence Analysis

Divergence Trading Terms - Divergence Analysis

There are two types of divergence:

1. Classic Divergence Analysis
2. Hidden Divergence Analysis

These divergence trading setups are explained on the forex lessons section of this site under the technical analysis section.