Divergence Trade Setups - RSI Indicator

Divergence is one of the trade setups used by Forex traders. Divergence trade setup involves looking at a chart & 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 & momentum.

Example:

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

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

We then draw one line on the chart & 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- 2 highs but the last one is lower

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

LL= Lower Low- 2 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:

1. Classic divergence trade setup
2. Hidden divergence trade setup