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How to Trade RSI Divergence

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Pit-falls of Trading with RSI. we’ll look at how traders can attempt to off-set this pitfall of RSI when trading in trend strategies. DailyFX is the news and education website of IG Group. Daily Forex Strategy With RSI Indicator. A simple yet profitable strategy to trade the daily charts. It’s made up of the RSI indicator and a custom built EMA trend indicator. This strategy requires patience and can be used for larger profit targets (even up to pips).

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This is the second article in our RSI series. If you haven’t already we suggest that your check out the first article about the RSI rogaineformen.cf that article, we covered the background of the “Relative Strength Index”, or “RSI”, indicator, how it is calculated, and how it looks on a chart.

The picture below will show 2 RSI indicators: The top RSI is set with 5 periods, and the bottom at 55 periods. Notice how much more erratic the 5 periods RSI is compared to the 55 periods. This is because the indicator is changing so much faster due to the fewer inputs used to calculate its value.

As an oscillator, RSI will read a value between one and , and will tell us how strong or weak price has been over the observed number of periods. If RSI is reading above 70, then price action has been strong, and price may potentially be over-bought. Because the indicator can show potentially over-bought or over-sold conditions, traders will often take this a step further to look for potential price reversals. The most basic usage of RSI is looking to buy when price crosses up and over the 30 level, with the thought that price may be moving out of oversold territory with buying strength as price was previously taken too low.

The picture below will illustrate further: Inherently, the Relative Strength Index presents a flaw to traders attempting to employ the basic usage of the indicator. RSI, by its nature, looks for reversals in price. If the market is ranging, this can be a desirable trait in an indicator, as traders can often look to initiate entries in a range with RSI.

However, if the market is ranging, the results can be unfavorable as price continues moving in the trending direction, leaving traders that had opened trades in the opposite direction in a compromised position. The picture below will illustrate this situation further: As you can see in the above graphic, price was trending up very heavily when four different RSI sell triggers occurred all circled in red.

Despite the fact that these sell triggers took place, price continued trending higher. If traders had opened short positions with these triggers, they would be in the precarious position of managing a losing trade. Perhaps more troubling is the fact that some traders may not be using stops on their trading positions, and the trader looking to sell an over-bought market because RSI had moved below 70, may find significant trading losses as the strength that originally caused the indicator to read above 70 continues to carry prices higher.

This is the divergence we are looking for! Once spotted traders can then employ the strategy of their choosing while looking for price to swing against the previous trend and break to higher highs. It is important to note that indicators can stay ov erbought and oversold for long periods of time.

As with any strategy traders should be looking to employ a stop to contain their risk. One method to consider in a downtrend is to employ a stop underneath the current swing low in price. Want to learn more about trading RSI? Take our free RSI training course and learn new ways to trade with this versatile oscillator. In this article, I am going to be showing you a simple trading strategy using the RSI indicator. You are going to benefit from this strategy by learning to trade divergence and find a low-risk way to sell near the top or buy near the bottom of a trend.

The RSI indicator is one of the most popular indicators used by traders in any market stocks, forex, futures, options. This indicator was developed by Welles Wilder around when it quickly became one of the most popular oscillator indicators for traders in financial markets.

This momentum indicator can fluctuate between 0 and providing overbought and oversold signals. The formula for this indicator is a bit complex:.

I could explain this whole process to you. However, I will spare you the details. I just wanted to share this with the mathematicians that are reading this who enjoy seeing equations. You can do a quick google search if you would like to learn more about this. The default settings for this indicator is a smoothing period of We are going to change that setting to 8.

Make sure you turn this setting before you jump into this strategy. The reason I like eight rather than 14, is that the RSI will be much more responsive to us which is very important when are looking for overbought or oversold price areas. Also go ahead into the RSI setting and change the lines in the indicator to 80, You will learn more about this later.

This indicator will be the only indicator we use for this strategy. The reason we only use this is that we have a strict set of rules we need to follow before we can enter a trade.

And these rules will, without a doubt, validate a reversal for us to open a trade. Here is another strategy on how to apply technical analysis step by step. This indicator comes standards on mostly all trading platforms.

You just need to make this adjustment. Find the currency pair that is showing a high the last 50 candlesticks. OR low depending on the trade. The reason for that is that there are reversals of trends in every period. So this can be a swing trade, day trade, or a scalping trade. As long as it follows the rules, it is a valid trade. We also have training for building a foundation before a forex strategy matters.

The only thing we need to make sure of in this current step is that it is the low or the high the last 50 candles. Once we determine this low or high, then we can move on to the next step. I drew vertical lines on the chart so that you can see the 50 candle low that we identified. If you need to use horizontal lines on your chart to verify that candle has closed the lowest the last 50 you can do so. This is not necessary but may be helpful for you to do and see how strong the trend is.

When we find 50 candle low, it needs to be coupled with RSI reading 20 or lower. Remember that this strategy is a reversal strategy. It is going to be breaking the current trend and moving the other direction. Wait for a second price low candle to close after the first one that we already identified.

The second price low must be below the first low, but the RSI Trading indicator must provide a higher signal than the first one. Remember, divergence can be seen by comparing price action and the movement of an indicator. If the price is making higher highs, the oscillator should also be making higher highs.

If the price is making lower lows, the oscillator should also be making lower lows. We have rules in place that will capitalize on this divergence so that we can make a significant profit. Keep in mind, that this step may take a bit to develop. It is very important to wait for this second low because it gets you in a better position to make a trade.

Remember, that our example is a current downtrend looking to break to the upside. If this were a 50 candle high, we would be looking for the exact opposite of this step.

Once this criterion has been met, we can go ahead and look for entry because the charts are showing us that a reversal is soon coming. You wait for the price to head in the direction of the trade and wait for a candle to close above the first candle that you identified that was previous 50 candle low.

Save this picture for reference, if are struggling with this step. This will guide you when you look for a trade. To place your stop bump back time periods and find a reasonable level to put your stop that makes logical sense.

So you are looking for prior resistance, support. We placed our stop below this support area. That way if the trend continued and did not break it could hit this level and bounce back up in our direction. I recommend you follow at least a 1 to 3 profit vs. This will ensure that you are maximizing your potential to get the most out of this strategy. You can adjust as you wish, but most good strategies that identify breaks of a trend use a 1 to 3 profit vs.

Here you can learn how to profit from trading. If you have questions or comments about this trading strategy you may reach us at info tradingstrategyguides.

For this strategy trading strategy, what is the best time frame use to calculate 50 candle for the step. Please i need your advise. For the strategy, i did use my own strategy by changing the indicator setting. I am using 2 period setting , 5 and maintain the 14 period. I add in the level from 70,60,50,40 and The 5 period mark yellow and 14 mark blue. The 5 period will show the entry buy or sell when crossing the 14 from bottom or down.

Again the level 60 and 40 will indicate to open buy or sell. I just add in to my chart the currency strength power indicator and make a decision to enter trade base on the current strength. But your strategy is something additional knowledge to me and many thanks to you for this strategy and can be very useful in my daily trade.

In my point of view the most important feature of the indicator is to predict with high percentage of accuracy of the reversal point or zone either over bought or over sold.

I really think that this indicator will be extremely valuable because in my experience reversals are one of my most profitable trades and I it can be a real pain trying to find it on the charts, this is exactly what I have been looking for.

Its always a pleasure hearing from a professional trader! An indicator which shows the supply and demand zones in all timeframes but especially the longer ones would really be useful. Four hour, Daily, weekly time frame reversal trades are huge!

We have back tested the indicator and it did show us great trade entries and exit points. For me any good indicator needs to provide reliable forecasts. But if you have a system with a strict set of rules you follow that more often then not will produce profitable trades, then you are on the right track! People in nature over think and over complicate things. Trading can be simple but some common sense has to be used.

Price action is king which is proven over and over again. A great development from a great company. Our philosophy is to make things more simple then what they need to be.

We hope our indicator will make peoples lives easier when searching for reversal trades. I am a new trader and at times one is so confused with so maby stratrgies out there. I have however enjoyed reading this strategy you have posted here.

Am going to change my settings to see if I understan it. Regards Shads shadtrans gmail. Hello there, Ineresting article! But I still find the strategy somewhat complicated. Well, why count till to 50 bars and what is the logic behind this? Then, why not 20, 15, 30 or so…? Did you bactest it or trade it live?

Please let me know. This line will always stay on your chart 50 candles back so there is not a tedious process of counting candles all the time. To answer your question about why we chose 50, the last 50 candles are still meaningful on your charts on any time frame.

Well Oteng, if there ever was an indicator that can do that, I tell you human traders would be obsolate or never needed again in trading. Or still the banks and big institutions with the money will still get their hands on it and put a way premium price on it to make it impossible for retail traders like you and me to get it. Keep the comments coming guys! Remember we are giving away access to three of these special indicators on friday!

Everyone who has commented so far is entered into the contest! When the bar closes — no more repaint. No signals 3,7 or 10 bars back. Easy to spot simple chart.

If additional filters is needed, then why not let the indicator do the work and only show the good signals? If it works on all timeframes and all markets it is also good. To put it short: I want the indicator to do most of the calculations for me.

So are the RZs based on that? I also liked your fractal strat. Thanks for all the great ideas. Whichever one comes first. You need to have both elements high the last 50 candles or low the last 50 candles coupled with divergence in price action with the rsi to meet the rules of the trade. Then obviously make the trade when the price action goes above or below that first identified candle.

With regards to previous comments about win rates, the Holy Grail is not the win rate but it is the Money Management. I like the clarity of your presentations, keep up the good work. Thanks, great advice Graham! Without properly managing your money, you are doomed to fail at the start. Hi thanks for all your great strategies, I am now finally starting to make some good profits this last 3 weeks keep up this excellent work.

We selected you to receive a free EFC indicator! Contact us at info tradingstrategyguides. Looks interesting, and I look forward to learning more on Friday. Seriously, if a strategy is too complicated, it just will not get used. Better to trade a simpler system repeatedly, even if it means the returns are not quite as good as the really complex system.

Right… no need to over complicate things. God Bless you richly! Is there a way to show on the charts the last 50 periods. Even a line that is plotted 50 periods prior and moves along as each period moves forward. Also, has anyone tested as to which timeframe this strategy works best for.

Combining reversals with a look back for previous market tensions is good. One vital feature for an indicator is that used profitably and frequently the price action it is revealing to the user becomes so familiar that you learn to read the market without the indicator. You asked what I would like in an indicator? There is no Holy Grail as most already know, but something that would create a solid indication of where to enter and exit a trade, along with it confirming a trending market.

Although what I would REALLY like in an indicator is a two armed, two legged one that would mentor me — helping me to be much more confident when I pull the trigger and not dither like my nana, and when to bale on a trade, and to walk with me as I trade for a period to guide me in my approach. To make me a professional trader and not a wannabe trader. How can I bolt one of these onto my MT4? Cup of tea anyone? Hello, strategy is built on simplicity, which I personally prefer.

Definitely I try tomorrow, looking forward to the novelty will be interesting: This looks really good. Just what a newbie needs to improve understanding and results, Thank you for your efforts. Love the strategies you guys post this 80,20 strategy is very simple to apply and wit a little patience to wait for the rules to be met i can see this strategy can be very profitable.

Thanks guys for taking time to trace. Looking forward to reviewing your new to be released indicator. You have a good track record of putting out good easy to understand strategies that are profitable. The bar is set high! I am much more interested in lower drawdown rather than a high winning percentage. I prefer to trade daily and 4 hour charts.

How well does your indicator perform on these historically? Settled on a few custom ones via ThinkorSwim. What I like about this EFC indicator is it seems to incorporate candle coloration of a temperature kind. Follows a logic hot to lukewarm to cool. This is just the strategy of trading that I recently stumbled upon as I examined several chart formation and changes in trend both short term and long term. Your indicator will serve a great purpose of automatically finding those spots of change and making trading a delight that it should be!

I look forward to trying it. Australian regulator ASIC is totally toothless and disinterested in retail trader scams. Oh yes I remember that group. Terrible to see that happen, hopefully some of the traders were able to continue and find success in your trading. Really looking forward to getting this indicator. Just one question relating to last 50 candles, I presume it is last 50 or more candles and not necessarily exactly 50 candles back?

Very grateful for all the great training! Best to keep the non-strategy candles and chart features as monochromatic i. Ok — I jumped in and bought the indicator — it looks just like the example below. Also the TP line is not always visible on the chart while the trade is in progress….

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Dailyfx team made excellent RSI image. Plus we have so many Special Bonus offers that this indicator will pay for itself instanly!

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John on March 25, at 2:

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