RSI Divergence signals allow traders to identify potential price momentum shifts in the market. These signals are generated when the Relative Strength Index (RSI) of a security indicates an about-face in the short-term trend direction. This article will detail how traders can use RSI Divergence signals to their advantage when trading different markets.
First and foremost, traders should have a basic understanding of the RSI chart and indicator. The RSI is an oscillator-style indicator, meaning it provides oscillating values between 0-100. Generally, when the RSI value is above 70, it signals that the security is “overbought” and when it drops below 30, it signals that the security is “oversold.”
One of the most important roles the RSI plays is in helping traders identify when a security may be on the brink of a drastic price move. And this is where RSI Divergence signals can be a trader’s best friend.
Let’s take a look at the definition of RSI Divergence. RSI Divergence occurs when the candles on the chart suggest that the momentum in the security is changing direction even though the indicator is still moving in the same direction. This could mean a possible reversal in the security’s price.
There are two types of RSI Divergence signals that traders should be aware of:
Bullish RSI Divergence: This occurs when the chart shows higher prices, yet the indicator is falling. This signals that buyers are in control and a move higher is likely.
Bearish RSI Divergence: This occurs when the chart shows lower prices, yet the indicator is rising. This signals that sellers are in control and a move lower is likely.
It is important to note that these signals should not be used to declare that the price is exceedingly likely to move in the opposite direction. Neither should traders go all-in on positions based on these signals. Traders should use RSI Divergence signals as an additional tool to their trading arsenal when analyzing the markets.
Combining RSI Divergence signals with other technical tools such as support and resistance, and combining them with a sound risk management strategy, can help traders find success in the markets. By understanding and utilizing RSI Divergence signals, traders can start trading like a pro.
