RSI Divergence Analysis - Divergence Trading Explanation

Divergence Analysis is one of the trade transaction setups used by technical traders. It involves looking at a chart and 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 and forms a new swing high or a new swing low but the RSI does not, indicating a divergence setup between the price and momentum.

Example:

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

Then using RSI we check and analyze the highs made and formed by the trading indicator, these are highs that are directly below Chart points A and 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 trade setups

In order to spot this set-up we look for the following:

HH = Higher High : 2 highs but last one is higher

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

HL = Higher Low : two lows but the last is higher

LL = Lower Low : 2 lows but last one is lower

First let us look at the explanations of these terms

Divergence Terms - Divergence Trading Setups Analysis

Divergence Terms - Divergence Trading Setups Analysis

There are 2 types of divergence:

1. Classic Divergence Analysis
2. Hidden Divergence Analysis

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

More Courses and Topics:

• SWI20 Trade Strategy
• How Can I Start Futures Trade Online?
• How to Sign Up for Live Account FX Trading
• Can I Trade XAU USD Online?
• Is ADX Leading or Lagging Trading Indicator?
• How to Set Accelerator Oscillator on Forex Chart on MT4 Software
• Gold Margin Calculator MT4 Software
• JP225 Stock Index Trading Strategy
• How Can I Read Bullish Bull Flag Chart Setup?
• How to Implement A Successful Gold Strategy Tutorial