RSI Indicator Divergence Analysis - Divergence Trading Explanation
Divergence Analysis is one of the trade setups used by technical traders. It involves looking at a chart and one more technical indicator. For our example we shall use the RSI.
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 and 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 indicator, these are highs that are directly below Chart points A & B.
We then draw one line on the currency chart and another line on the RSI indicator.
RSI Divergence 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 Terms - Divergence Analysis
Divergence Terms - Divergence Analysis
There are 2 types of divergence:
These divergence setups are explained on the lessons section of this site under the analysis section.
