Relative Strength Index (RSI) divergence is a technical analysis indicator that traders use to identify potential reversals in the direction of a security's price trend. It measures the relationship between price and momentum to identify when the current trend is losing strength. The indicator compares the closing price of an asset over a certain period with the highs and lows during the same period.
In This Article
What is RSI Divergence?
How To Analyze Chart Using RSI Divergence
Category
Trend
Type
Lagging
The Relative Strength Index (RSI) divergence indicator is a technical analysis tool used to identify potential reversals in price trends. It is based on the idea that when the price of a security is making higher highs, the RSI should also be making higher highs.
Conversely, when the price is making lower lows, the RSI should also be making lower lows. If the price and the RSI diverge, it can be an indication that the current trend may be losing momentum, and a reversal may be imminent. To identify RSI divergence, you can plot the RSI indicator alongside the price chart of the security you are analyzing.
After calculating the RSI, you should plot it on the chart along with the price data. It will allow you to see how the RSI moves relative to the price action. Then, move on to identifying potential divergences. A divergence occurs when the RSI and the price action are moving in opposite directions.
For example, if the price is making new highs, but the RSI is failing to confirm these highs, this could be a bearish divergence. Conversely, if the price is making new lows, but the RSI is failing to confirm these lows, this could be a bullish divergence.
After identifying a potential divergence, you should wait for additional confirmation before taking action. It could involve waiting for the RSI to cross a certain level (e.g., 30 or 70) or waiting for a candlestick pattern to form on the chart.
If the divergence is confirmed, you can use it as a signal to enter or exit a trade. For example, if you see a bearish divergence on a long position, you might consider closing the trade to take profits or entering a short position.