An RSI divergence indicator signals traders when price action and the RSI indicator do not reflect the same momentum.
The RSI (Relative strength Index) is a momentum indicator which evaluates price changes to determine overbought and oversold market conditions. It can be rated from 0 to 100. The market is considered oversold if the Relative Strength Index falls below 30. The market is considered overbought if the Index value exceeds 70. A lack of signals is one of many problems that can be experienced when using an indicator. This indicator rarely reaches the levels of overbought or oversold.
Divergence from the standard indicator is necessary to counter this problem. Divergence is a way to determine when the market will resume its trend after a pullback.
A chart with an RSI divergence will produce lower highs if the relative strength index is on the chart. This occurs when the price makes new higher highs. The indicator will show higher lows when the price hits new lows.
A RSI divergence is when the Index stops making higher highs in an upward trend or falls to lower lows in a downward trend. Divergence is a sign that the current trend has lost momentum. This could indicate that the current trend has lost traction and be used to place a bet on a reversal of market price activity. An indicator such as the RSI is oversold will show a bullish divergence. This will be followed by a lower low that corresponds with lower price movements. If the Relative Strength Index indicator is too high, then a lower high is seen that corresponds to higher highs. This is a bearish divergence.
RSI Divergence Indiator BUY/SELL Signs
You need to find bullish and bearish divergences in order to find Indicator buy/sell signals. Bullish divergence gives us buy signals while bearish divergence gives us sell signals.
This chart shows an uptrend. The Indicator has lower highs than normal and is in an oversold state. We enter the trade at this point. This is a confirmation of a bullish divergence.
Either wait for confirmation candles or enter a trade when the RSI reaches the oversold territory. You can set a stop-loss at the most recent low, and then exit the trade when the RSI Divergence begins to decline.
Bottom line RSI Divergence indicator
The standard RSI indicator can sometimes show false signals. The RSI Divergence Indicator combines divergences and the classic RSI indicator to give you a general idea of where the price may be headed next.