Some traders stick with RSI while others prefer MACDs or some other oscillator. This is a little like the choice between P/E ratios versus P/E/G ratios for fundamental analysts. In the chart below, you can see a bullish divergence identified by an RSI setting higher lows (1) in the lower extreme range while the market was making lower lows. You can also see the same signal on a CCI which is hitting much more extreme lows (2) compared to recent history.
Divergence is a classic discrepancy between trend highs and lows on the price chart and indicator readings. The main difference between a hidden and a regular divergence is the outcome of the movement. A hidden divergence will produce continuation of the primary trend, while a regular divergence produces a trend reversal. A bullish divergence takes place when the price of an asset moves down and makes a lower low, while an accompanying technical indicator such as the MACD makes a higher low.
A bullish divergence is an excellent timing signal for traders to go long in the market or to buy call options. When bullish divergence occurs, the lows in MACD are rising while the price continues to fall. A momentum oscillator, that gauges the direction and power behind price movements. It is most often used as a measure of being “overbought” or “oversold”. RSI calculates based on the candle close, which is why candle bodies are used rather than candle wicks to determine divergence. A situation where the price candles’ tops or bottoms point in a different direction from the corresponding tops or bottoms of the indicator’s signal line is called a divergence.
The RSI can in addition, be used to spot a bearish pattern of divergence. The snapshot below illustrates how to spot a divergence using the RSI. Explore the latest MetaTrader platform and access advanced trading features and tools. Access the most powerful trading tools and features directly from your browser. ThinkMarkets ensures high levels of client satisfaction with high client retention and conversion rates.
If you forgot, momentum traders seek stocks that are moving significantly in one direction with high volume. These traders attempt to ride the momentum train – or roller coaster to the desired profit. That is, of course, if you know what to do with the goose when you have it. Luckily, this golden egg of opportunity is reflected in several different patterns.
- The RSI is a technical indicator that measures the current price strength of previous stock prices.
- A classic bullish divergence is formed before an upward reversal of the current trend.
- Then, when the MACD crossover happens, the bullish divergence pattern is completed and the price changes direction rapidly.
- Due to this, to trade bullish or bearish divergences, you do not need to radically change your trading strategy.
Our watch lists and alert signals are great for your trading education and learning experience. Here’s an example below of a case where the price is rising – quite steeply, for that matter, but the RSI is not. The stock pulls back, starts to trade sideways, and reaches new support of approximately $37. Asktraders is a free website that is supported by our advertising partners. As such we may earn a commision when you make a purchase after following a link from our website.
Stochastic Oscillator
Technical traders will often regard an overbought or oversold signal as stronger if it is accompanied by a divergence. Although, as with the other indicators, it is important to note that the RSI signals are not 100% reliable, so it should be used as just one part of a technical strategy. If there is a reading over 80, the market would be considered overbought, and if the stochastic oscillator is below 20, it would be considered oversold.
Fundamental Analysis vs Technical Analysis Differences
However, we will enter trades, only if the price breaks the Moving Average of the Bollinger Bands and the bands are expanding at the same time. This way we will get confirmation for our signals and we will enter trades only during high volatility. We will exit our trades when the price crosses the Moving Average of the Bollinger Bands in the opposite direction.
Just like the overt divergence setups, hidden divergence setups can be of the bullish or bearish variety. Class B bearish divergences are illustrated by prices making a double top, with an oscillator tracing a lower second top. Class B bullish divergences occur when prices trace a double bottom, with an oscillator tracing a higher second bottom.
What is Bullish Divergence?
Beyond the indicators mentioned above, many others can be used to trade divergence. Like all trading strategies, divergence indicators also have a certain degree of risk, whether you use the RSI, MACD, or stochastic oscillator. The most important thing is to identify which indicators to use, understand them, and https://bigbostrade.com/ then practice with them before utilizing them in trades. To reduce false signals, one tip is that divergence, especially hidden divergence, tends to be more accurate on longer time frames. With longer time frames, the market does not move as fast, and it’s easier to determine the patterns of highs and lows.
Also, we provide you with free options courses that teach you how to implement our trades as well. We want you to see what we see and begin to spot trade setups yourself. We make the most profits when we spot divergences and act best forex system accordingly. RSI is the average gain of up periods during a specified time frame divided by the average loss of down periods. However, you’re in trouble if something slows your momentum – like a broken cable or loose bolt.
One of the Bollinger Bands features is that entering an overbought or oversold market is also considered a divergence. In other words, there is a downward movement with the lows updating. At the same time, an increase in the minimums on the MACD histogram is visible. By all indications, this is a classic bullish divergence, so expect an upward price movement.
Bullish divergence is excellent for considering a reversal of the trend. Bullish divergence happens when the price makes a lower low, but an indicator such as RSI, Stochastics, or MACD makes a higher low. For QQQQ shorts, this is a warning that risk control is going to become much more important because there is a high probability that the trend will be disrupted in the short term. However, since the signals can be more frequent, many of them might be false signals which need to be filtered out. Any of the divergence types can be found when applying the RSI indicator.
