In the previous two blogs, we have seen how RSI helps us generate entry and exit signal and also helps us identify the trend and take a trade in that direction.
In this blog, we are going to learn something more advanced.
We will now learn how to identify trend reversal and how to catch rallies using RSI Divergence.
So let’s get started :
We know that RSI is a momentum based Oscialltor and it almost reacts in Sync with the price of the stock.
If the price of the stock is going up RSI levels also go up
As stock creates Higher High, corresponding RSI also creating higher high.
and if price drops we see a drop is RSI levels too!
As stock creates lower lows, RSI also creating lower lows.
However, very rarely you will observe a strange pattern between Stock price and RSI line.
Both would seem to go in the opposite direction indicating the stock movement is probably a false move.
Stock is forming a Higher high but corresponding RSI is forming lower High, indicating that in spite of stock making higher high, the bears are slowly making their way up in the trend and this also marks the entry for SHORT.
Stock is forming a lower low but corresponding RSI is forming a Higher low, indicating that in spite of stock making lower lows, the bulls are slowly making their way up in the trend and this also marks the entry for LONG.
Thus RSI divergence helps you catch trend reversal based on the divergence between Stock price and RSI lines.
This is Purely a Positional study, don’t try this in Intraday!
Watch the video explanation here :