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.
I have read in technical analysis book , if the number of candles more from 14 between the lower lows, then it will be not count as divergence Signals
in your example 1 and 2 ,the number of candles is more from 14
what you can say about that sir?
TraderMozo
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@ata011, Hi there, my humble opinion is, what is being shown in books or resources out there are general examples. In reality, you can use the same concept/pattern/strategy, however, not every trade or signal will line up perfectly.
For example, if a material states that a 61.8 Fibonacci retracement is the maximum level a price should retrace, will it be wrong if a currency pair retraces at the 70 level? Another example would be how the levels in harmonic patterns do not line up perfectly when price correction starts. Likewise, in these examples that I've shown, the prices do start correcting even though there are >14 candles. Of course, there can be other reasons for the correction, but that will be up to you to spot it, which will not be using a RSI divergence strategy. Cheers!
A_C_I
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Can u tell how long a correction lasts after we spot the divergences in general?
Sometimes 2 divergences could be found on the same time frame. Bullish and Bearish at the same time. What is the right thing to do when it happens? (Oct 17 BTC hourly chart).
Ty.
TraderMozo
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@A_C_I, Hi, I do not have definite answer to how long a correction lasts because it is dependent on what instrument you are trading and therefore it varies.I have referred to the BTC hourly chart but it does not fit into the divergence signal strategy that I use.
The occurrence of RSI divergence signals are important -- look out for bearish signals (lower highs) at overbought levels, and bullish signals (higher lows) at oversold levels.
What you can try to gauge would be the oversold / overbought levels. For example, a short from overbought levels could possibly be held till oversold levels, vice versa.
The chances of have conflicting signals are quite rare, but should they appear, the best thing to do is wait. Cash itself is a position, Cheers!
You draw the div line on the full body of the candle stick and not on the wicks (as RSI accounts only for open/close) and then the lines aren't put random but on the local high and local low, after they get confirmed, not earlier on random candles.
TraderMozo
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@cryptoBob102, Thanks for your comment, I understand where you are coming from. Wicks are a part of my trading style and therefore I incorporate it when identifying RSI divergence signals. When such signals appear, it is time to look out for entries but not blindly trade it.
It is true that one should only enter a trade with confirmation (e.g. price action / other indicators), and that is why I have stated it in the description as well. Cheers!
YannickVerstraete
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Would you suggest using heikin ashi with divergences?
TraderMozo
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@YannickVerstraete, Sure, you may use it if it works for you. I personally do not use the heikin ashi candlestick method because raw candlestick data (without any difference in calculation of OHLC) is important in spotting trade entries for my trading method.
RSI divergence trades are fairly simple, and I will just look out for the price action that supports the RSI divergence for any possible entry.
in your example 1 and 2 ,the number of candles is more from 14
what you can say about that sir?