EDUCATIONAL PURPOSES:
There are several indicators that one can employ during the course of analysis. One common indicator will be the Relative Strength Index.
What can you draw from this indicator?
Overbought and Oversold signals!
However, one can also use this indicator to spot divergences in the price and the relative strength!
Above are 3 examples of RSI divergences: AUDCAD, AUDSGD and GBPAUD.
The main idea is to look out for differing directions between the price and the RSI within the same period.
As we can see from AUDCAD and AUDSGD, price was creating lower lows while RSI was creating higher lows. This is an example of a BULLISH RSI DIVERGENCE, and price will soon start correcting.
In the case of GBPAUD, another higher high on the price carves out a lower high on the RSI. This shows that there is a BEARISH RSI DIVERGENCE, and price will soon start correcting.
Spotting divergences helps with timing of trade entries (whether it is too late or too early), exiting of positions and/or adding more positions. You can also use this as a trigger for a trade (i.e. a Long trade in AUDCAD, or a Short trade in GBPAUD).
The time frame that you use to spot divergences will affect how long you have to wait for price to start correcting (i.e. shorter time for H1 as compared to Daily).
**One important point to note when spotting or trading on divergences: Observe for price action in line with your bias (bullish price action for bullish RSI divergence, vice versa).
RSI divergences can fail should it carve a higher high or lower low that is in line with price.
There are several indicators that one can employ during the course of analysis. One common indicator will be the Relative Strength Index.
What can you draw from this indicator?
Overbought and Oversold signals!
However, one can also use this indicator to spot divergences in the price and the relative strength!
Above are 3 examples of RSI divergences: AUDCAD, AUDSGD and GBPAUD.
The main idea is to look out for differing directions between the price and the RSI within the same period.
As we can see from AUDCAD and AUDSGD, price was creating lower lows while RSI was creating higher lows. This is an example of a BULLISH RSI DIVERGENCE, and price will soon start correcting.
In the case of GBPAUD, another higher high on the price carves out a lower high on the RSI. This shows that there is a BEARISH RSI DIVERGENCE, and price will soon start correcting.
Spotting divergences helps with timing of trade entries (whether it is too late or too early), exiting of positions and/or adding more positions. You can also use this as a trigger for a trade (i.e. a Long trade in AUDCAD, or a Short trade in GBPAUD).
The time frame that you use to spot divergences will affect how long you have to wait for price to start correcting (i.e. shorter time for H1 as compared to Daily).
**One important point to note when spotting or trading on divergences: Observe for price action in line with your bias (bullish price action for bullish RSI divergence, vice versa).
RSI divergences can fail should it carve a higher high or lower low that is in line with price.
