RSI Divergence refers to the deviation of RSI with respect to price. Even though the price may be going in a set direction (say making lower lows), the RSI could go in a completely different direction (higher lows). RSI is a clearcut indicator of buyer strength or buyer accumulation at a specific given time and price. An RSI Divergence generally is strongly related to change in trend.
RSI Divergence can be of 2 types: Bullish and Bearish. Here I shall discuss about Bullish RSI Divergence. In case of Bullish RSI Divergence, the price makes a lower low (in a downtrend) while the RSI makes higher lows (a sort of W formation). This shows that even though the price is dropping, the buyer strength and accumulation is increasing.
Please refer the image above for visual example.
How to trade? In case of bullish divergence, one should go long with a SL below the low of the present price.
In the present case, one can go long in Amaraja with a SL of 660 and for a target of 800-850
Komen
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Stock made a high of 700..The stock is up by 3% from suggested levels. Hope some of you acquired the stock for short term or long term gains..Cheers!
Dagangan aktif
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Stock made a high of 720..Pure 6% from recommended levels. An easy swing trade done. However the wait for the short term target is still far away! Fingers crossed
Komen
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Stock is halting at 720 levels after a big upmove from suggested levels of 680. It is forming several Doji candles and inside candles. Can move upto the first big time resistance of 740...
Komen
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Stock made a high of 740..Now stock may halt for some time before marching towards 800..REversals upto 710-720 levels are also possible..But reversals upto 660 levels seem close to negligible.. RR Ratio achieved till now = 1:3
Sorry to write that this is not the way I trade a bullish divergence. Will the trade as indicated in this post work? Well, it may work (all the best!) but for me the setup is incomplete.
Most traders jump in when they see a setup like the above, only to be stopped out often and lose money. For example, look at what happened on 23rd and 24th August. That was a perfect bullish divergence. On 24th, the price tested the low of 23rd and ended the day in green. However, the very next day on 25th, the price went below the previous low!
Every bullish divergence is not tradeable. One needs additional confirmations, to significantly increase the probability of success, before a trade can be put in. Two points need to be confirmed.
1. For a bullish divergence to work, the price MUST close above the previous swing low, in this case the low on 29th July. (See what happened on 25th Aug. The price could not go above the low of 29th Jul.)
2. If point 1 is fulfilled, then an end of bear phase (at least, in the short term) is indicated. But don't jump in yet. After the above point is fulfilled, wait for a price reversal. The price should go lower and not lower than the latest swing low (say, in this case on 26th Aug) and then start moving up again. At this point, MACD should have reversed and be now in buy mode.
This is the time to enter into a long trade.
Now one can connect this reversal point with the low on 26th Aug to form a upward sloping trend line.
- A close below this trend line should signal a stop-loss.
- Price touching this trend line and again going up will give opportunities to add volumes.
- The first target would be the price difference between the lows of 29th Jul and 26th Aug, added to the low of 29th Jul. (If the bullish divergence is confirmed in AMARARAJA this time, then the target would be 721.30.
Please note two aspects about bullish divergence.
1. A "price low and indicator high" is only a "divergence". For it to become proper bullish divergence, the price must cross the last swing low.
2. Every bullish divergence will not result in successful long trades. For this, we need a "confirmation" of bullishness. This can be obtained only after a pull-back to a higher low. PLEASE do not enter a buy trade unless this pull-back happens. Wait patiently for this pull back. This is very important.
A succesful buy trade is not about catching the lowest point. It is about increasing the probability of success. Of course, nobody (yes, NOBODY) can predict which way the maret will turn in future. So always use protective stops, based on your risk ability, so that you still survive to do the next trade.
@Kesari-Bath, Hi. Please don't apologize for posting your opinion and analysis. This forum is open for active discussion and simultaneous improvement. What I have presented here is simple basic trading strategy. What you are referring to is an in-depth analysis of using RSI divergence to trade along with confirmation. I have not touched upon it yet because it would have been too confusing. As you have pointed out, no trading setup or indicator is 100% efficient. A 60-70% efficiency of a tool or indicator or setup is more than enough.
Only a trader with high risk-appetite would enter Amaraja now without multiple confirmation. Even though the trader risks entering the trade without multiple confirmations, you can see that the Stop Loss for him/her because a very small one. What is the advantage of a very small stop loss? A high RR ratio and also the trader can re-enter the stock again when the stock moves in the predicted direction. And my aim here is exactly that - to have a very small SL with a big target giving a high RR ratio. Let me explain with an example -
1. From 20th to 30th July there was a small RSI divergence which could be traded with a entry at 709 and SL at 690 i.e. 20 or just 3% with a target of more than 1:2.
2. Between 25th and 26th Aug, we again see a RSI divergence and we can enter at 682 with a SL at 662 i.e. 3% with a target of more than 1:2.
Can you see here that my SL has been decreased to just 3% with a target of more than 10%? This is what a trader with a certain level of experience does. I am trying to make an early entry and not trying to find out the bottom of the stock which is impossible to detect. Another point I would like to make, is that the RSI divergence I have shown expands over a month. If any accumulation is happening for more than a month (open up the weekly chart and you can see), it is definitely strong and we can be confident on it.
PS - I agree that the trend change confirmation can only be done when the previous swing (low or high) is broken and the stock sustains above it. This should be followed by traders who are beginning their trading.
Thank you for your elaboration. It is my pleasure to interact with well-trained traders like you.
TraderLeVeR
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@tksthathachari, Anyone who doesn't have a trading plan and trades without it is just GAMBLING
This is the reason why most people loose money!
Journaling trades with the same setup and plan is the only way to go!
I will only use RSI divergence as extra confirmation(hidden or regular)
tksthathachari
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@TraderLeVeR, Yes. RSI is an indicator and it should be treated like that. Price action is supreme and it must be integrated with the indicators to arrive at a final conclusion.
Kesari-Bath
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@tksthathachari,
Different traders have different trading styles and different risk tolerances, and so I guess this is okay. I just had two questions:
1) You write that there is a RSI divergence between 20th and 30th Jul. However I noticed that RSI is lower on 29th Jul compared to 20th Jul. What made you to write this remark?
2) You have indicated a target of 800 to 850. I personally feel this is a tall order, and too wide a range. What is the intended time frame for this target, and what is the rationale behind these values?
tksthathachari
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@Kesari-Bath, I posted this as a learning episode and not an absolute setup. To me price action is the God when it comes to technical analysis because it makes analysis simple and without any much clutter. I consider indicators as supportive confirmation and not absolute trade tools.
1. The RSI is only slightly lower ..about 2 points which can be seen as almost flat since we are using a larger daily timeframe. I have indicated flat RSI in my chart too which was formed over a month. As to my experience, I find this to be true. However the same is not true for smaller time frame.
2. Yes a target of 800 is a large target and it won't be achieved in short time. It can be taken as a short term trade. It is impossible on my part to exactly say how many days or months the stock will take to reach those levels. With my short experience, I have learnt that you can never pinpoint the time-duration in which your target may be achieved even though the stock may move in your predicted direction. So I will refrain from doing so.
Which zones do I consider as support and resistance?
The zones from which the price has moved at least 5% up or down ( only for daily time frame).
According to this, the first resistance comes out to be 740-748. Then the second resistance would be around 790-795..Hence these become my targets in the short term. If you put up the volume profie indicator, you can observe large volumes are traded in the price range of 738-746 (approximate values). So from here I predict that quick buying may happen leading to upsurge. Additionally, the stock is so beaten down that a quick upsurge is more probale to happen with again a sharp fall. The 200 EMA is also around 785 I guess. Having said this, I cannot explain everything with absolute logic and rationale since there is also a certain level of conviction involved in my trades which have come from personal trading experience.
Thank you for your valuable contribution to the TradingView community and keep up the good work!
Good clear chart with good clear explanation.
A nice simple trading strategy that is easy to understand.