Introduction to Divergences
RSI & Divergences
This video breaks down RSI divergences and how they signal momentum shifts. The focus is on bullish and bearish divergences, avoiding hidden divergences, which are considered unreliable. In this video we use the 14-period RSI setting, meaning it tracks data from the last 14 candles.
Understanding RSI Divergences
Bullish Divergence
Price makes a lower low, but RSI makes a higher low.
Signals upward momentum and a possible reversal.
Bearish Divergence
Price makes a higher high, but RSI makes a lower high.
Indicates weakening momentum and a potential downtrend.
Why They Matter
Help spot reversals early.
Work best in extreme RSI zones (above 70 = bearish, below 30 = bullish).
Confirming Divergences
Use Candle Closes → Ignore wicks, as RSI is based on closing prices.
Check Line Charts → Reduces noise, making divergences clearer.
The 14-Candle Rule → Divergence should form within 14 candles for reliability.
Wait for Confirmation → RSI should turn away from extreme levels before entering a trade.
Trading RSI Divergences
Scaling In
Enter (For example) 50% of the position when divergence confirms.
Add remaining 50% once price moves as expected.
Common Mistakes
Entering too early - price can keep trending before reversing.
Ignoring extreme RSI zones - divergences are weaker in the 30-70 range.
Not using multiple timeframes - tight divergences may show better setups on lower timeframes.
RSI Divergences in Action
Bitcoin Example → BTC made higher highs, but RSI made lower highs, leading to a sell-off.
Multi-Timeframe Analysis
Weak divergence on H1? Check M15 for clarity.
Stretched divergence? Confirm on higher timeframes (D1/W1).
Exiting Trades & Taking Profits
When to Close a Trade
Strong move in trade direction.
RSI returns to neutral (50 level).
RSI crosses back over 50 in shorts (signals bullish momentum returning).
Final Takeaways
RSI divergences are strong reversal signals - but require confirmation.
Use multiple timeframes to validate setups.
Scaling in helps reduce risk and improves execution.
Avoid premature entries - let RSI move away from extreme zones first.