In this article, we will master the RSI Divergence strategy as this is a high percentage win rate strategy when spotted.
What Is RSI?
RSI is the abbreviation for Relative Strength Index. It is also regarded as a momentum indicator, hence a leading indicator. If the price of an asset moves in a certain direction, the momentum indicator (RSI) moves in the same direction.
The RSI has a value that ranges between 0-100 and it shows cases of overbought and oversold conditions. At a value of 70, RSI shows overbought condition (short entries should be considered) and at a value of 30, RSI shows oversold (long entries should be considered). This is an into to RSI so as to enable you understand the basics of this article.
When the price makes higher high (HH) and the RSI makes a higher high (HH), this us referred to as “Convergence”.
When the price and RSI does not follow the same path or direction, then it is called “Divergence”.
Our main focus is on RSI Divergence, so will not dwell on convergence.
Types Of RSI Divergence
RSI divergence are of two types namely:
- Bullish RSI divergence
- Bearish RSI divergence.
RSI Divergence Trading Strategy (100% Win Rate)
In this strategy, our focus will be on larger tumeframes (4H above) but can be considered for lower timeframe when scalping.
RSI divergence happens when the average change in the time period of RSI is in a different direction to the price. When this strategy is spotted, I can assure you that it never fails and with a good entry.
Today’s strategy will employ Bullish Divergence.
The Bullish RSI Divergence happens when the price forms two “Lows” and the RSI forms two “Highs”. That is, the price forms a lower high to a lower low and the RSI forms a higher high to a higher low.
Important Things To Note:
- The price direction must be a downtrend with lows and not a ranging/choppy market.
- Levels of lower high and lower low and higher high and higher low must be clearly spotted.
When this Strategy has been confirmed, a good entry should be made using any entry strategy of your choice (demand zone, demand/supply zone retest, supply absorption candle, e.t.c.).