The RSI divergence strategy is an extremely popular indicator in technical analysis. So what is the formula for calculating RSI? How to apply the advanced RSI index to bring high efficiency in Forex trading? This article will help readers answer the above questions and better understand this trading tool.‘s with Forex Trading!
What is RSI?
Before learning about the RSI divergence strategy, traders need to understand the concept, formula, and fluctuation level of the RSI index. RSI (abbreviation for Relative Strength Index) is a technical analysis indicator, used to represent the correlation between average price increases and decreases over a specific period.
By monitoring the RSI index, investors can identify price divergences, and evaluate and predict future trends. Besides, this index also indicates overbought and oversold conditions in the market.
Formula to calculate RSI index
To calculate the RSI indicator, you apply the formula:
RSI = 100 – 100 / (1 + RS)
In there:
- RSI is an indicator that needs to be determined.
- RS (or Relative Strength) = Average increase / average decrease.
Oscillating levels of the RSI index
The fluctuation value of RSI ranges from 0 to 100. Based on the fluctuation level, you can identify the price condition of the market.
- RSI < 30: The asset is oversold and has an upward trend.
- RSI > 70: The asset is overbought and has a downward trend.
- RSI at 50: Signaling no trend.
- 30 < RSI < 70: Asset price is at a neutral level.
See more: Be more successful through this technical analysis
Answer: What is RSI Divergence?
Divergence occurs when the market price shows signs of moving opposite to the technical index. This shows that the strength of the price is weakening and tends to change. Thus, it can be understood that the RSI divergence strategy, or RSI Divergence, is the movement in the opposite direction between the price and the RSI indicator (determined through peaks and troughs). Investors often apply the RSI divergence strategy as an indicator to identify price trend reversal signals.
Divergence in RSI is often divided into 2 types:
- Positive divergence of RSI.
- Negative divergence of RSI.
In addition, traders can also apply stochastic indicator to determine overbought, oversold levels, and future price trends. This indicator is quite sensitive to market fluctuations, so it often gives timely and accurate signals. The Stochastic RSI indicator has been commonly used since 1994 and is similar to the Stochastic Oscillator.
Analyze common types of RSI divergence strategies
By monitoring and analyzing price trends in the Forex market, traders can recognize when positive and negative RSI divergence strategies appear.
RSI divergence strategy is a positive
The moment the price chart shows a decreasing signal, while the RSI indicator tends to increase, is when a positive divergence appears. At that time, the price will reverse and gradually increase. Traders often tend to fish for the bottom or buy in.
If the first bottom of the indicator is deep in the oversold area and the second bottom begins to diverge, the trading signal will become clearer and more accurate. To confirm the signal, investors can use other technical analysis tools.
RSI divergence strategy minus
When a negative divergence appears, the market price will show an increased signal and create a new peak higher than the old one. Meanwhile, RSI tends to decrease and creates a lower peak than the old one. This shows that the price will reverse and decrease gradually. Traders should place orders to take profits or sell.
Investors should note that when the first divergence signal occurs, the uptrend begins to weaken, but the price continues to follow the trend. From the second divergence signal, the price broke the uptrend line, signaling the time to sell for traders.
How to apply advanced RSI in trading – RSI divergence strategy indicator
Applying the advanced RSI indicator not only helps traders recognize divergences and predict price trends but through that, you can also manage risks in trading, limiting the deepest capital loss when investing. fourth (also called Drawdown ).
Trading Principles for RSI Divergence
The strategy using advanced RSI helps investors calculate the RSI value for a specific period. From there, draw the price trend line and the RSI indicator. When this indicator diverges from the price line, it means RSI increases while the price decreases or vice versa. This is a sign of a trend reversal and shows a trading signal.
In case RSI bottoms when the price line reaches its peak, a buy signal will appear. If the RSI peaks when the price bottoms, a sell signal is generated. Traders can trade based on the size of the RSI value. At the same time, the strategy using RSI Divergence also has the feature of placing take profit and stop loss orders. Thanks to that, you can effectively control risk, limit Drawdown levels, and increase your profits.
Place a buy order with the RSI divergence strategy
To set up a buy order, please note the following:
- Enter an order when a divergence signal appears in the RSI.
- Use basic but strong candlestick patterns (such as Morningstar, Bullish engulfing, Pin bar, ascending and descending trend candlestick patterns,…). These models are the basis for traders to determine order placement and stop loss ranges. And the trading signal candle is bullish.
- Closed divergence trading is trading according to the market trend. Meanwhile, divergence trading will often go against the trend. Therefore, traders should apply closed divergence trading.
How to enter a buy order when you see an RSI divergence signal
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Apply RSI divergence strategy to enter sell orders
In case of placing a sell order, traders need to clearly understand:
- Enter an order when you see the RSI divergence signal.
- Use candlestick patterns such as Evening star, Bearish engulfing, Pin bar, ascending and descending trend candles, etc. And the trading signal candle is bearish.
- Investors should trade closed divergences, similar to buying orders.
How to apply divergence in RSI to enter sell orders
Conclude:
The strategy of using the RSI divergence strategy brings high efficiency in Forex trading. Hopefully, through the above sharing, traders have grasped the formula and how to apply this technical indicator, thereby making reasonable investment decisions. To not miss the latest information about the Forex market, don’t forget to visit Forex Trading!
FAQs:
Below are some frequently asked questions when traders apply the RSI Divergence indicator in trading.
What are common mistakes when using RSI divergence signals?
Many traders often place orders immediately when they notice oversold and overbought signals. For the overbought zone, if the price goes deep into the 70 threshold, up to the 75 – 80 threshold, the sell order may be liquidated. If RSI falls below the 30 threshold, it can continue to fall deeply to the 0 – 20 level, and the trader’s buy order will be liquidated.
Can RSI Divergence be combined with other technical analysis tools?
RSI Divergence does not always give 100% accurate signals. To confirm trading signals and prevent risks, you should combine this indicator with other indicators such as MA, trendline, MACD…
What level should the capital loss rate be kept when investing?
A low capital loss rate shows that the trader is using an appropriate trading strategy. You should keep this ratio below 20%. Because the capital loss rate exceeds 20%, it is very difficult for you to recover the initial investment capital.
