In this guide I will walk you through the three main different kind of divergences and explain to you how you can spot them.
I also show you the extreme power RSI divergences have by looking at BTC/USD and mark them on the chart. It's quite special to see all these three kinds immediately after another, and it's really nice to see them all working out here as well.
Obviously, no signal will not provide a 100% success guarantee. But this text-book example on the BTC price showing how they work out every time is great for both learning and profit taking.
It can be very hard to trade an asset that has seen such immense growth and nearly vertical upwards momentum. Using RSI divergences you will still be able to predict price reversals and trade successfully. So let's take a closer look at the three different forms of RSI divergences that I cover here on the chart.
Exaggerated Divergences Exaggerated divergences are similar to regular divergences, but are considered weaker and less predictive variations. The term exaggerated refers to a circumstance where either the oscillator or price makes an equal high or low. Regular bullish divergences and regular bearish divergences both have two exaggerated variations, so there are four exaggerated variations in total. In this case we look at a bullish version where the price is consolidating the but the RSI shows an increase in momentum.
Hidden Bullish Divergences A Hidden Bullish Divergence is considered a continuation signal in an uptrend. It refers to a circumstance where an oscillator reading falls down below its previous low, while price is still higher than its previous low. Hidden bullish divergences are most likely to occur in the middle of an uptrend – often after a healthy pull back – and indicate that the uptrend will most likely continue. The starting point of a hidden bullish divergence should be a clear swing, not just a red candlestick.
Regular Bearish Divergence A Regular Bearish Divergence is considered a strong reversal signal in an uptrend. It refers to a circumstance where price rises and makes a higher high, while the corresponding oscillator reading is still lower than its previous high. Bearish divergences are most likely to occur in strong uptrends and signify that upward momentum is weakening. A reversal – or at least a pull back – is then expected to follow. Regular bearish divergences also appear in exaggerated form.
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- Trading Guru
-------------------------------------------------------------- Disclaimer! This post does not provide financial advice. It is for educational purposes only!
You never fail to impress us with fantastic content gentleman.
Trading-Guru
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@TheSignalyst, This one was an idea long in the making! Hope people find it valuable
Trading-Guru
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I will be posting more of these regularly, so follow me to find out about great trading opportunities
floatnthang
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@Trading-Guru, Sounds good. I'm sure BTC may see some retests and more volatility in the next few weeks. Everyone is looking at the US political issues as well. Your charting seems to give us an idea of possible weakness or straight looking forward.
Trading-Guru
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@floatnthang I am a little bit reluctant sharing ideas for further out than a couple of days for this exact reason. I will trade shorter time frames now with stop losses. These issues scare me as they can have a sudden and big impact
floatnthang
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@Trading-Guru, Very true. Buy and hold is not always the best with leveraged accounts. Cheers and good trading.
Thank you for sharing these observations, I love your charts, they are very helpful for those of us learning to trade!
I see this chart is on the 1h, and you are using RSI 14 close indicator. Does this work on different time frames, or do you only use it on the 1hr. It appears to me that people day trade on lower time frames like 1m, 5m, etc. Or do you need to adjust the indicator as you switch time frames? If you need to adjust, what are your recommendations to do so?
Trading-Guru
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@muhtrades I love this question, really shows you’re putting the right amount thought into this. So far I have not really experimented with changing the RSI in my divergences.
A while ago I ran a backtesting script to see which RSI values would yield the highest profits, and it did seem to have a small peak near 14 (perhaps due to the self fulfilling prophecy that many have the 14 RSI on their chart and then react as such?). Further optimal values seems to be towards slower RSI values of 30+.
As the 14 just refers to the previous amount of candles used in the calculation, it adjusts automatically too per time frame. So there is no implicit need. I find that technical indicators work less on the 1m, 3m and 5m time frames so I usually start applying them from 15m and up.