RSI Indicator Divergence Setups

Indices Divergence is one of the trade setups used by traders. It involves looking at a chart & one more technical indicator. For our example we shall use the RSI indicator.

To spot this divergence setup find two stock chart points at which price makes a new swing high or a new swing low but the RSI indicator does not, indicating a divergence between trading price & momentum.

RSI Divergence Example:

In the chart below we spot two stock chart points, point A and point B (swing highs)

Then using RSI indicator we check the highs made by the trading RSI indicator, these are highs that are directly below the Chart points A & B.

We then plot one line on the chart & another line on the RSI indicator.

RSI Divergence Setup - Divergence Trading using RSI Indicator

How to spot trade divergence

In order to identify this stock trade divergence setup we look for the following:

HH=Higher High- two highs but the last one is higher

LH= Lower High- 2 highs but the last one is lower

HL=Higher Low- two lows but the last one is higher

LL= Lower Low- 2 lows but the last one is lower

First let us look at the illustrations of these terms

Divergence Terms Definition

Divergence Terms Definition Example

There are two types of stock trade divergence setups:

1. Classic Trading Divergence
2. Hidden Trading Divergence