RSI Divergence: Spotting Trend Reversals
Detects divergences between price and RSI indicator to anticipate potential trend reversals.
What is RSI Divergence?
RSI (Relative Strength Index) divergence occurs when price action and the RSI indicator move in opposite directions. This disconnect between price and momentum often signals that the current trend is losing steam and may be about to reverse. Divergence is one of the most powerful tools for identifying potential turning points in the market.
Types of Divergence
Bullish divergence: Price makes lower lows, RSI makes higher lows. Bearish divergence: Price makes higher highs, RSI makes lower highs. Hidden bullish: Price makes higher lows, RSI makes lower lows (trend continuation). Hidden bearish: Price makes lower highs, RSI makes higher highs (trend continuation).
How to Spot Divergence
Look for the RSI indicator to move in the opposite direction of price. For bullish divergence, wait for price to make a new low while RSI forms a higher low—this suggests selling pressure is weakening. For bearish divergence, watch for price to make a new high while RSI forms a lower high—this indicates buying pressure is fading despite the price rise.
Trading RSI Divergence
Divergence signals work best when combined with other confirmation. Look for support/resistance levels, candlestick reversal patterns, or volume shifts to confirm the divergence. Enter after confirmation rather than immediately on the divergence, and set stops beyond the recent swing high/low. Divergence can take time to play out, so patience is essential.
Practice Risk-Free
Master these concepts with paper trading before risking real capital.
Start Paper TradingDisclaimer: This article is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss. Cryptocurrency investments are volatile and high-risk. Always do your own research before making any investment decisions.