Indices Trading Divergence Definition

Divergence trading concept is a concept where a indices trader will for a difference between the stock indexes price movement with the movement of a technical indicator. For our example we shall use the RSI indicator to explain divergence trading.

RSI indicator is one of the commonly used divergence trading indicator. This indicator is an oscillator similar to the RSI and it can be used to trade divergence setups just the same way as the RSI indicator.

RSI Indices Technical Analysis and RSI Indices Trading Signals

RSI Divergence Indices Indicator

RSI Bullish Divergence Setups

Classic RSI Bullish Divergence

RSI classic bullish divergence occurs when stock indexes price is making lower lows (LL), but the RSI is making higher lows (HL).

RSI Indices Trading Divergence Definition

RSI classic bullish divergence warns of a possible change in the indices trend from down to up. This is because even though the stock indexes price went lower the volume of sellers that pushed the stock indexes price lower was less as illustrated by the RSI indicator. This indicates underlying weakness of the downward trend.

Hidden RSI Bullish Divergence

Forms when stock indexes price is making a higher low (HL), but the RSI is showing a lower low (LL).

RSI hidden bullish divergence occurs when there is a retracement in an upward indices trend.

Indices Trading Hidden Bullish Divergence - RSI Indices Trading Divergence Definition

This setup confirms that a retracement move is complete. This RSI divergence setup indicates underlying strength of an upward indices trend.

RSI Bearish Divergence

Hidden RSI Bearish Divergence

Forms when stock indexes price is making a lower high (LH), but the oscillator is showing a higher high (HH).

Hidden bearish divergence occurs when there is a retracement in a downward indices trend.

Indices Trading Hidden Bearish Divergence - RSI Indices Trading Divergence Definition

This setup confirms that a retracement move is complete. This divergence indicates underlying strength of a downward indices trend.

RSI Classic bearish divergence

RSI classic bearish divergence occurs when stock indexes price is making a higher high (HH), but the RSI is lower high (LH).

Indices Trading Classic Bearish Divergence - RSI Indices Trading Divergence Definition

RSI Classic bearish divergence warns of a possible change in the indices trend from up to down. This is because even though the stock indexes price went higher the volume of buyers that pushed the stock indexes price higher was less as illustrated by the RSI indicator. This indicates underlying weakness of the upward trend.