RSI DIVERGENCE PRICE ACTION STRATEGY
- RSI DIVERGENCE PRICE ACTION STRATEGY
- PART ONE
- PART ONE. RSI + DIVERGENCE
- SECOND PART. CONFIRMATIONS
- PART THREE. DIVERGENCES AND SR LEVELS
The best trading system for binary options with Divergences, SR, Trendline, Time Frame, Correlations.
The RSI is one of the best known and most used indicators, but we all know that there is no such thing as a “magic” tool. RSI is also no exception.
Using the RSI indicator in the classic way, ie with inputs at the entrance (or exit) of the “hyperzone”, often leads to negative results.
The “Advanced RSI Strategy” is a complete trading system that, starting from RSI, uses price action to verify the correct analysis: divergences, static or dynamic trendlines, correlation between currencies and time frame checks.
We remind you that any indicators are used only to support what we have already established with our price observation and the RSI is no exception.
This strategy applies to different assets, currency pairs, crypto, stocks, etc.
Finally, attached at the end of the tutorial you will find a section dedicated to the theory of divergences and a list of assets that can be used for “correlation”.
WHAT IS THE RSI INDICATOR
The Relative Strength Index, or relative strength index, is one of the most popular oscillators in technical analysis, commonly used by traders to identify a market price that is too high or too low.
The RSI value varies from 0 to 100 and two levels are shown which correspond (default) to the value 70 and the value 30. The area above the value 70 is the overbought one and the one below the 30 value is the oversold one ( oversold).
When the RSI line (white in this MT4 chart) exceeds 30 the asset is considered an underestimated price, when it exceeds 70 it is considered an expensive asset.
The system is divided into three parts. The first part is the basic one and deals with the RSI system with divergences, the second part explores the subject with confirmations and the third part contains further price action analyzes.
HOW THE RSI INDICATOR IS USED NORMALLY
Most traders enter the “long” trade when RSI is in the oversold zone, vice versa in “short” when RSI is in the overbought zone.
“Short” entrance (also called Down, Sale or Put)
Using RSI in this way often presents a problem. After crossing the line, prices often do not reverse direction, but continue to remain in the “hyperzone” or even to continue in the same direction, leading to a loss of the operation.
This often happens in the case of a strong market trend.
By trading this way you could get a significant number of lost trades. We will therefore use the indicator in only one way: by combining the RSI signal with the “ Divergence ”.
PART ONE. RSI + DIVERGENCE
Divergence occurs when the prices on the chart move in the opposite direction to the RSI indicator, thus anticipating a possible trend change.
At the end of the tutorial you will find a section dedicated to differences: how to identify them, how to trace them, what type, etc.
We plotted the trendlines (white lines) connecting the maxima of the charts to each other. We note that their mutual inclination is divergent. This leads to the next change of direction.
The trendline is plotted starting from the relative maximum (M) at the crossing point of the RSI hyperzone , towards the second maximum (red circle), followed by a corresponding trendline on the main chart.
Depending on whether maximums or minimums are connected in the graph, we have two possible types of tracking in our strategy, which tends to identify a price inversion (there are two other tracking ways that give rise to the so-called “hiden convergence”, hidden convergences, which give instead an indication of continuation of the trend (the complete description in Appendix 2).
Left: link of lows, bullish exchange rate. Right: link of highs, bearish exchange rate.
Therefore, minimums in the graph and minimums on RSI are connected, or maximums in the graph and maximums on RSI, but never minimums on the graph and maximums on RSI, or vice versa:
In the graph seen above (black background) we have an increasing maximum (higher high) and in the RSI we have a decreasing maximum (lower high) which leads to a divergence between the trendlines and therefore to a possible price reversal .
On the left side of this graph we can identify another divergence, and draw two other lines, which also in this case are divergent:
Let’s look at another example, divergence in the lower hyperzone.
We trace the trendline towards the decreasing minimum of the main chart (lower low) and the increasing minimum of the RSI (higher low):
The result is a change in the direction of the trend.
RSI COMPARED TO MACD
Divergence can also be used with other indicators, such as the popular MACD, but RSI gives a more precise and clear divergence, which leads to higher quality trading.
Two identical graphs but with different indicators. In the case of the MACD there are no differences.
Let’s summarize some key concepts:
Indicators are not “magic”:
- Never use them alone for trading inputs
- Use them only to support the analysis you’ve already done with the price action.
If used correctly Divergence is one of the most powerful tools for detecting changes in quality direction.
There are various types of divergence, but we will analyze two of the most important, the “large” divergence and the “tight” divergence.
TYPES OF DIVERGENCE RSI
The “wide” divergence, as the name suggests, occurs when the oscillations on which the trendline is drawn are distant from each other, with maximums (or minimums if not) that is, quite distant from each other, as in the figure:
The divergence based on wide swings (wide wings) gives good forecasts of reversal, as the trend in question is not under full control of the investors.
Depending on the position of the RSI chart with respect to levels 30 and 70 we can divide each “large” and “narrow” divergence into 2 subtypes:
- When it happens inside the hyperzone
- When it happens near the hyperzone (without touching it)
- When it happens inside the hyperzone
- When it happens near the hyperzone (without touching it)
Let’s see the two types of broad divergence.
Here is an example of a large divergence within the oversold zone:
And now an example of a large divergence near the oversold zone (i.e. RSI did not cross the line):
Now we see the second type of divergence instead, the narrow divergence.
The “narrow” divergence, as the name suggests, occurs when the oscillations on which the trendline is drawn are close to each other, with peaks that are close to each other, as in the figure:
Sometimes these oscillations are so close to each other that it is difficult to notice them:
The line chart comes in handy. We also draw the trendlines in the chart and highlight the divergence:
The lows are close so it is a tight divergence.
To identify it more easily, we therefore use the linear graph and highlight the lowest low (lower low) on the graph and the highest low (higher low) on RSI:
Here is another example comparing the charts:
As you can see, it is much easier to identify tight divergences on a linear graph.
Such divergences, when used correctly, are just as important as large divergences.
Another example and graphical comparison:
Now let’s see in the following graph divergences in hyperzone (overbought, oversold), both wide and tight:
We have so far looked at the case of divergences occurring within the hyperzone, i.e. RSI has exceeded the 30 or 70 levels.
Now we show the case of divergence inside the central RSI zone (close to the red line 30, but not touching it), as in the figure:
In conclusion, here is a list based on the quality of the signal obtained from the divergences:
- Best. Wide swings + RSI in hyperzone (unless it hits the line)
- Excellent. Wide price swings + RSI near the hyperzone
- Great. Tight price swings + hyperzone RSI (at least it hits the line)
- Good. Tight swings + RSI near the hyperzone
SECOND PART. CONFIRMATIONS
Remember that with the RSI strategy you are trading against the trend , so divergence alone may not be enough to get a reliable signal. Further confirmation is required to validate that the trend change is real.
For this purpose we use price action , but only after the divergence has already given us a signal of a change in trend.
DIVERGENCE + CONFIRM
There are many patterns / figures that can help us, but to keep things simple we will use dynamic trendlines. Let’s see the figure:
The divergence is confirmed only after the break of the trendline that we have drawn by joining together the lows of the swings. If it is not possible to draw a trendline of sufficient quality, we will consider the divergence alone as not reliable enough.
If we did not wait for the trendline to break, prices could instead continue following the previous trend.
Here is another example where the trendline break is expected:
Let’s see another example where the input signal is missing.
This is a divergence that should indicate a change in trend, from bullish to bearish, however this change does not happen:
Prices continue, there is no breaking of the trendline, no trade.
This is a clear example that shows that the RSI Divergence alone is not sufficient to obtain a valid signal.
PART THREE. DIVERGENCES AND SR LEVELS
We deepen our strategy by completing the divergence with further elements, such as key level (SR) and trendline. Let’s analyze it by dividing it into separate parts for greater clarity.
DIVERGENCE + SR LEVELS + TRENDLINE
By SR level we mean a key area of possible reversal, consisting of a resistance or support.
The concept is to find a divergence at a “key level” or SR level.
In the following figure, in addition to the presence of a trendline, we have a large divergence in correspondence with a key level, in this case a resistance.
This resistance reinforces the divergence signal (in this case also based on wide swings). A confirmation of the change in trend.
Entry to the break of the trendline.
Let’s see another example, in this case the divergence is at a support, and there is also a trendline that we need as a reference for the possible breakout.
The divergence is wide, wide. Remember again that wide does not refer to the slope of the divergence lines, but to the distance between the swings.
So another case of excellent signal.
Even the case of divergence based on tight swings at an SR level, although of a slightly lower quality than the wide one, still gives a very valid signal.
Let’s analyze the graph below, drawing a support and divergence lines:
As this is a tight divergence, the fluctuations are not very visible. Better to switch to the line graph:
The line chart can be used to better visualize swings and plot divergences. To check the correct breakout it is convenient to go back to the classic candles:
At the breakout, I enter Call.
DIVERGENCE + SR LEVEL + TRENDLINE + TIME FRAME
In the following figure we have drawn a valid resistance that passes through the various maximums and we are in the presence of a tight divergence, identified on nearby oscillations.
We do not know at the moment if there will be a breakout or if prices will continue following the trend.
No trade without breakout. For more information on what will happen we can move on to observe the candles at a lower time frame .
This new consideration concerns the time frame currently in use. Typically using a single time frame does not give us accurate information.
To confirm the trend change, we can observe the candles at a lower time frame to verify their divergence with RSI.
We have drawn our resistance zone and expect further reaction at that level. Entering Call we could risk losing the trade as prices could break the resistance.
So let’s look at the candles in the area of the white circle in the time frame lower than the current one (whatever it is, the choice depends on your strategy, this analysis is valid for any time frame). Our aim is to find a trend change signal.
Without this you cannot know what happens inside those candles.
Your decisions must be made based on what you actually see in the chart without evaluating the next direction based on your personal impressions.
Suppose we are in a 1 hour time frame (H1). Let’s move on to the 15 minute time frame (M15).
Let’s compare the charts:
The left support in our original time frame is the same as the lower right time frame.
It is not enough for the prices in the left chart to break out of support. We need to see what happens inside the candles in correspondence with the key area, through the tracing of trend lines and divergence lines:
We can now see the swings on M15 and thus plot our divergence. Furthermore, it is also easier now to plot trendlines as the fluctuations are evident, whereas before they were not noticed in the original time frame.
We just have to wait for the confirmation of the breakout to open our position in Call.
The change in trend was confirmed and it really happened.
We have an SR level and we want to see what happens inside the candle whose shadow shows that the prices have reacted to the resistance.
Let’s move to the lower time frame and compare the graphs, also plotting divergence and trendline:
We have a clear divergence with relative breakout. We can open our position (PUT).
Prices react to support. Let’s see what happens inside the candle in the figure (H4):
Let’s examine the lower time frame. Same support and same downtrend. Let’s draw the divergence:
To see better we switch the H1 graph to line, where it is easier to notice the divergence (tight):
All that remains is to wait for the trendline breakout to open the operation:
We have a resistance and a candle whose upper shadow indicates an attempt to react at that level.
Let’s see what’s actually inside the candle, zooming in by observing a lower time frame.
The resistance is the same in the two graphs. The entry signal at the break of the trendline.
Let’s analyze the candles by moving to the lower time frame M15:
To be sure of the divergence it is best to switch to the line chart which confirms our analysis:
The entry signal on breaking the trendline:
The candles of the highlighted area react at the SR level, as evidenced by the long lower shadows.
Let’s zoom in on the area with the time frame method, to see if the price action gives us useful information:
RSI divergence, SR level reaction, trendline breakout. The elements to evaluate an entry in Call are all there. CALL.
We have a strong SR level, as prices have reversed direction several times there.
In the area under consideration we see a candle with a long shadow, due to the reaction to the level.
We zoom in through the examination of time frames. The SR level is the same in the two graphs.
Entry (Put) ONLY in case of trendline breakout.
In this case we find it difficult to trace the trendline.
If too far we risk losing the trade, If too close it is not very effective, so no trendline no trade.
To solve the problem, we increase the second maximum of the divergence by moving to the lower time frame M15.
Entrance to the breakout.
The trading system described so far is already to be considered complete.
Those who want further examples and insights for even safer entrances can complete the course by studying the second part, essential for those who want to seriously engage, becoming part of that minority of traders who earn with trading.
… The RSI PRICE ACTION STRATEGY continues in Part Two (advanced system)
The second part expands the strategy with further trading techniques, for even safer entries. Detailed images, indicator, examples and attachments complete the system.
The complete strategy (also including this first part in PDF with high quality images) can be downloaded immediately by purchasing it at the price of only 89 euros.
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