RSI Divergence : Unbelievable IQ Option Trading Strategy 2020
Today we talk about the Divergences and especially divergences on the RSI indicator. which are often very good trend reversal signals and they’re very accurately signal when a trend is over.
What is a Divergence ?
so let’s start with the basics what is a divergence?. divergence is basically when your indicator and your price action are not doing the same thing. so for example when you see a Rayleigh prices going up it’s making higher highs and usually your indicator does the same. but sometimes they are out of sync so right here we can see it’s going up price all the way but at the same time the indicator the RSI is making lower highs which shows that indicator and price action are not in sync anymore. RSI Divergence
so we can draw some trend lines here and you can see that they are not in sync anymore. so this means that because the RSI is measuring momentum which and it analyzes the size of your price candles and also if you have more red or green candles. RSI Divergence. so this means that during the first trend wave here price you can see price has a lot of green candles and they were much larger than the red ones.
Whereas here in the second one the second trend leg on the bullish trend there were fewer green candles and also not as larger anymore and then during the final trend wave here you only have two green candles and the price the trend wave came to an end very quickly and then even here when it then moved sideways we had some of the doji’s some of the hanging man or pin bars or kangaroo tails whatever you call them where you have this wick to the upside and then price immediately rejects a man falls down. which is another clue that the trend is losing momentum and to indicate adjuster confirms that.
For RSI Divergence basically you don’t even need the RSI but I always prefer to use indicators especially the RSI because it adds some objective signals and it takes out a lot of the emotional decision making traders. often struggle with so the RSI and the divergence is a very important tool in my trading and I highly encourage it for you.
so it’s also important that to note that our Side Divergences are only important after long trends you can get a lot of divergences all over the place such as here for example you have a higher highs. here and here’s some sort of lower highs or you can see previously there was not a lot of trending going on and also then the following reversal was not as strong. whereas here it’s a very different scenario you have this long trend there was then slowly losing momentum the buyers were leaving the arena and then eventually price soared off and created a very nice reversal in the other side of the trend.
so the first rule is always to look for reversals and divergences at the end of strong trends. then for if you want to trade reversals after the Divergences. the most important thing to understand is that not all reversals lead to a complete trend shift so often after such a trend and then you see the divergence you just get some sideways price action and prices going nowhere and you want to avoid those scenarios.
so for that I plotted the moving average on my chart it’s the 20 period which I think works very well for those types of trades and then the final signal that would then and signal our short entry would be the break of the moving average. So you can see during trends the moving average always holds up very nicely it often excess support resistance but once the the moving average is broken especially after such a nice divergence then it usually creates those complete trend shifts and we can filter out a lot of those sideways market tops that we that don’t offer any trading opportunities.
so we can look and then after this this bullish reversal we enter this sell-off here very nice one time it breached the moving average but did not go anywhere and then as price moved into the lows here we can see that this bearish trend with both very strong lots of red and large candles but then the second one here is much shorter compared just like we saw here.
so as we can guess this would have brought us another RSI Divergence the RSI made a higher low whereas price made lower lows the classic divergence and then price started to move higher he had broke the moving average use the arrow again to market it broke here. it did consolidate sideways and did not shoot up straight away but it is very normal and you can always see that you cannot expect those clear up-and-down moves and price um sometimes need this time to consolidate and make up its mind.
But eventually price never really broke the moving average to the downside again RSI Divergence and then we had this nice rally that has now found resistance in this area but overall this would have been a very nice second reversal trade after the divergence so I hope this makes sense if you have any questions around divergences just leave a comment below and I’m very happy to have you out .