Divergence Trade Setups - RSI Indicator
Divergence is one of the trade setups used by Forex traders. Divergence trade setup involves looking at a chart and one more indicator. For our example we shall use the RSI indicator.
To spot this divergence trade 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 forex chart below we identify two chart points, point A and point B (swing highs)
Then using Forex RSI indicator we check the highs made by the Forex 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 technical indicator.
RSI Divergence Trade Setup
How to spot divergence setup
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 Trade Terms
Divergence Trade Terms
There are two types of divergence trade strategies:
- Classic divergence trade setup
- Hidden divergence trade setup
