What are Divergences?
Divergence means that an oscillator such as MACD, RSI, or Stochastic is pointing towards a direction conflicting with the price trend.
Convergence, on the other hand, means that the oscillator is moving in the same direction as the price trend.
Divergences are of two types – regular or classic divergences and hidden divergences.
Regular divergences predict a trend reversal while hidden divergences predict trend continuation.
A regular divergence will occur where the oscillator is forming higher lows as the price trend forms lower lows.
This means that the oscillator is predicting an upward trend reversal.
Similarly, where the oscillator forms lower highs yet the price trend forms higher highs, is a regular divergence predicting a downward trend reversal.
A hidden divergence will occur where the oscillator is forming lower lows as the price trend forms higher lows.
This means the oscillator, in a hidden manner, is predicting an upward trend continuation.
Similarly, where the oscillator forms higher highs as the price trend forms lower lows, is a hidden divergence predicting a downward trend continuation.
What is the RSI Hidden Divergence?
The RSI hidden divergence is a hidden divergence involving the Relative Strength Index (RSI) as the oscillator.
Here, the RSI line plot forms lower lows when the price is forming higher lows and higher highs when the price is forming lower lows to predict price trend continuation.
I know you have winning strategies that you use to make money in Olymp Trade with RSI. But would you mind increasing your wins and earning more in 2021? I guess not.
In this post, I will show you how to use the RSI hidden divergence trading pattern to increase your wins in Olymp Trade.
The RSI hidden divergence is simple to spot and use in Olymp Trade. If you aren’t using it already, consider including it in your list of winning strategies.
Using the RSI Hidden Divergence Trading Pattern to Increase Your Wins in Olymp Trade.
So how can you use the RSI hidden divergence to increase your wins in Olymp Trade?
Knowing what divergences are, and specifically what the RSI hidden divergence is, does not make you instant money, or does it?
Well, it doesn’t, but knowing how to use that RSI hidden divergence in Olymp Trade can make you money, and that is what you are about to learn here.
Follow these simple steps to use the RSI hidden divergence trading pattern to increase your wins in Olymp Trade:
Establish the Market Trend.
The first thing to do is to establish a trend.
The RSI hidden divergence predicts a trend continuation and so without a trend, we would actually not understand what we are doing.
But how do you establish the trend a market is in?
You can use price action, moving averages, and other indicators as you please.
However, for this guide, we will use a moving average such as MA 20. That way, if the price is trading above the moving average, such is an uptrend, and if trading below the moving average, such would be a downtrend.
Make sure to also apply the Relative Strength Index (RSI) on your chart.
It is what you will be using to see the RSI hidden divergence and without it then there is no RSI hidden divergence to be seen.
All set? We proceed to the next step.
Spot the First Swing of the RSI.
This step is the first most relevant as far as spotting the RSI hidden or regular divergence is concerned.
Be sure to do things right here, because an error at this stage would mean a whole lot of blunders.
Now, observe the price trend on the chart, to make sure you catch a significant pullback towards the moving average.
The initial trend must also resume so that the RSI can form a swing.
What do I mean?
Is the price on an uptrend where the moving average is pointing upwards and the price trading above it?
Let the price retrace significantly downwards to the moving average and back upwards.
Look at the RSI to make sure it has formed a corresponding swing low that stands out and take note of it.
Are you dealing with a downtrend where the moving average is pointing downwards and the price trading below it?
Let the price retrace significantly upwards to the moving average and back downwards.
Look at the RSI and make sure it has formed a corresponding swing high that stands out and take note of it.
In both cases, if the pullback and the corresponding RSI swings are not significant and don’t stand out, ignore them.
Wait for that time when you will get significant pullbacks and RSI swings.
Identify the Second Swing of the RSI.
This is the second most relevant step as far as spotting the RSI hidden divergence is concerned.
You must also do things right on this step because another error here would mean a chain of errors thereafter.
You will need to catch a second significant pullback and a corresponding RSI swing that stands out. Like the first case, you must allow the price to retrace to the moving average and the initial trend to resume so that the RSI can form a swing.
Is the price still on an uptrend after the first downward pullback and initial uptrend resumption were successful?
Let the price then retrace significantly downwards again to the moving average and back upwards.
Look at the RSI to make sure it has formed another corresponding swing low that stands out and also take note of it as in the image above.
On the other case, is the price still on a downtrend after the first upward pullback and initial downtrend resumption was successful?
Then let the price retrace significantly upwards again to the moving average and back downwards.
Look at the RSI to make sure it has formed another corresponding swing high that stands out and also take note of it.
Like in the identification of the first pullback and RSI swing, if the two don’t standout at this stage, still ignore them.
You can then wait for that time when they will be significant and satisfactory to move to the next stage.
Join the two RSI Swings.
Immediately after the second RSI swing forms, you should join it with the first to establish the presence or absence of the RSI hidden divergence.
But how do you join the two RSI swings?
If you were dealing with an uptrend, you now have two RSI swing lows which you took note of and marked.
So, first, apply a horizontal line at the level where the first RSI swing low occurred.
After doing so, draw a trend line from the point where the first RSI swing low occurred to the point where the second RSI swing low occurred.
An ideal RSI hidden divergence should give you a focal point where both the horizontal line and the trend lines originate, as the trend line diverges downwards from the horizontal line.
In brief, the second RSI swing low is at a lower level than the first RSI swing low.
If you were, however, dealing with a downtrend, you now have two RSI swing highs which you took note of and marked.
First, apply a horizontal line at the level where the first RSI swing high occurred.
After doing so, draw a trend line from the point where the first RSI swing high occurred to the point where the second RSI swing high occurred.
An ideal RSI hidden divergence should give you a focal point where both the horizontal and trend lines originate, as the trend line diverges upwards from the horizontal line.
In short, the second RSI swing high is at a higher level than the first RSI swing high.
Confirm The Price Trend.
Did you get an ideal RSI hidden divergence on an uptrend?
Then go back to the price chart to confirm that the price trend is still upwards. That will give you a green light to proceed.
On the other hand, did an ideal RSI hidden divergence form on a downtrend?
Then you also need to look at the price chart once more to ensure that the price trend is still downwards. If so, you can proceed to the next step.
If you find the price trend has changed in either case, you abort the mission! You can begin looking for other RSI hidden divergences until all steps until here are correctly met.
Look for Trade setups.
If the price trend is still upwards and you already have an ideal up trade RSI hidden divergence, look for bullish trading set-ups.
On the other hand, look for bearish trading set-ups if the price trend is still downwards and already have an ideal up trade RSI hidden divergence.
Bullish trade set-ups include:
- The hammer.
- Bullish engulfing.
- Morning Star.
- Bullish inside bar.
- Popgun Bar Pattern with bullish outside bar.
- Bullish Pin bar.
Bearish trade set-ups include:
- The hanging man.
- Bearish engulfing.
- Evening Star.
- Bearish inside bar.
- Popgun bar Pattern with bearish outside bar.
- Bearish Pin bar.
Enter Buy or Sell Positions.
An ideal up trade RSI hidden divergence on an uptrend followed by any bullish trade set-up is a buy signal.
However, an ideal down trade RSI hidden divergence on a downtrend followed by any bearish trade set-up is a sell signal.
Enter the buy or sell trades accordingly.
Adjust Your Stop Loss and Take Profit.
Make sure to place your Stop Loss just below the low of the trigger candlestick for buy trades.
However, place it above the high of the trigger candlestick for sell trades.
Doing so kicks you out of erroneous positions early enough before any substantial losses.
Apply a logical risk to reward ratio of at least 1:2 in adjusting your Take Profit relative to your Stop Loss Order.
This is because we have no price movements we can measure to project profit targets.
Do you now see how the RSI hidden divergence trading pattern comes in handy to increase your wins in Olymp Trade?
Add it to your list of winning trading strategies and make more money trading in Olymp Trade in 2021.
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