



The Relative Strength Index (RSI) is a well versed momentum based oscillator which is used to measure the speed as well as the change of directional price movements. Essentially the RSI, when graphed, provides a visual mean to monitor both the current, as well as historical, strength and weakness of particular market. The strength of weakness is based on closing price over the duration of a specified trading period creating a reliable metric of price and momentum changes.





Divergence





Although divergence is not an indicator in that it is not mathematical construct, it is often said to be a leading indicator, hence its inclusion in this section.





Divergence refers to the difference in movement between an oscillating indicator, such as MACD, CCI, RSI, Stochastic, etc., and the price action of the underlying financial instrument.





(1) Regular Divergence





Regular divergence is used as a possible sign for a trend reversal. When price action makes higher high or lower lows while the oscillating indicator does not. In other words, regular divergence indicates that a probable trend reversal could occurs through it does not indicate when this will occurs. For this reason chart often turn to trend lines, chart patterns and candle stick patterns to time the entry into trade.





Regular Divergence Types





(A) Regular Bullish Divergence

(B) Regular Bearish Divergence





(A) Regular Bullish Divergence





If price is making lower lows (LL), but the oscillator is making higher low (HL), this is considered to be regular bullish divergence. The normally occurs at the end of a downtrend.





After establishing a second bottom, if the oscillator fails to make new low, it is likely that the price will rise, as price and momentum are normally expected to move in line with each other.





Below is an image regular bullish divergence.





Regular Bullish Divergence



(B) Regular Bearish Divergence





If the price is making a higher high (HH), but the oscillator is lower high (LH), then you have regular bearish divergence on chart. The normally occurs at the end of a bullish trend.





This type of divergence can be found in an uptrend, After price makes that second high, if the oscillator makes a lower high, then you can probably exact price to reverse and drop.





In this image below, we see that regular bearish divergence and price reverses after making the second top.





Regular Bearish Divergence



(2) Hidden Divergence





Hidden divergence occurs when the oscillator makes a higher high of lower low while the price action does not. This often tends to occur during consolidation or corrections within an existing trend usually indicate that there is still strength in the prevailing trend and that the trend will resume. In other words, hidden divergences is akin to a continuation pattern. As with regular divergence, hidden divergence can be bullish or bearish.





Hidden Divergence Types





(A) Hidden Bullish Divergence

(B) Hidden Bearish Divergence





(A) Hidden Bullish Divergence







This can be seen when the pair is in a uptrend. Once price makes a higher low (HL), look the oscillator does the same. If it doesn't and makes a lower low (LL), then we've got some hidden divergence in our hands. The normally occurs at the end of bearish trend.





Below is an image hidden bullish divergence





Hidden Bullish Divergence



(B) Hidden Bearish Divergence





This occurs when price makes a lower high (LH), but the oscillator is making a higher high (HH). Now you have probably guessed that this occurs in a downtrend. When you see hidden divergence, chances are that the pair will continue to shoot lower and continuation the down trend.





Below is an image hidden bearish divergence





Hidden Bearish Divergence



RSI Trend Continuation Example Below Image





(A) RSI Bullish Trend Continuation





RSI Bullish Trend Continuation



(B) RSI Bearish Trend Continuation





RSI Bearish Trend Continuation



Trade safe, Stay healthy.

Hope this post will enhance knowledge of some traders.