RSI divergence trading strategy forex: forex trading strategy | How to Trade Divergence

if i were to rank the various indicator-based trading setups i would always put divergence first it is the most ideal reading strategy and can be combined with a variety of other setups and the most important thing is there is to reward ratio divergence gives a very high risk to reward ratio because unlike other indicator based trading setups divergence is not lagging it is a leading trading setup that means that you won't have to see the price change the trend and then get an indication from the indicator later when the price has already moved on instead divergence will indicate exactly when the price reverses divergence is hands down the best and my favorite trading setup but there are a few problems with it many times you may get fake reversal signals and the price may just keep on moving and you may keep on losing money so here i have a video for you all and i hope that you guys enjoyed this video hello and welcome to forex monopoly i am dutch and in this video i will tell you how to trade divergence and avoid the losing streaks and i'm also going to tell you about my five percent rsi rule so make sure you watch this video till the end so now before we move forward let us first understand the indicator which we are going to use and also some basics about divergence so we are going to use the rsi for finding divergence as it is a leading indicator and gives real-time data also it is quite versatile so you can adjust the settings as per your use now the rsi that is the relative strength index is a momentum oscillator that calculates the strength of the price change happening in the market and it shows the overbought and the oversold conditions here the overbought means that the price is too expensive and sellers may enter and oversold means that the price is too cheap and buyers may get in so the rsi is shown as a line between two extreme levels and these two extreme levels can be set as per our needs so this is the rsi indicator the above line year is level 70 and indicates an overbought level and so any time the price comes here the price reverse the lower line is level 30 and indicates a oversold level so anytime the rsi line comes over here the price moves back up now this is the most important part where the majority of the and that is with the setting of the rsi all they do is keep the setting to the default or make it extreme highs but that's not how you do it the settings of rsi depends upon the type of the market like if the market is bullish then the levels should be 240 and 80 and if the market is bearish then the level should be to 20 and 60. and if it is ranging then the levels should be to 30 and 70. so this is what the thumb rule of the rsi says but i prefer to use it as per different situation so what i do is i follow the five percent rule so as for the five percent rule what i do is i will take the data of four to five months and then draw a line such that the rsi doesn't move past the line more than five percent so i mark both the lines and then i put that number in the settings and i repeat the same steps after every three months so that i always get the perfect accuracy so this is how i set my rsi and it helps a lot while trading divergence now let us understand what is divergence but before that if you are enjoying this video make sure you hit that like button and also i am going to add another strategy video very soon so do not forget to subscribe to this channel now the term divergence means to move apart it is like the price action does something else and the indicator says no not like that and does opposite thing like let's say this is the indicator window and this is the price action window so basically the rsi indicator or any other oscillator indicator is made to follow the price but in case of divergence it opposes it and tells us that there is a momentum change in the market or it tells us that there is something wrong in the market so let's try to understand this let's say the price was creating lower lows and lower highs but the rsi instead of creating lower lows and low high created a lower low and a higher low therefore telling us that there is something wrong in the market and that the price will reverse now so let us take some examples of divergence so that things get clear to you and then we will move to the part where i will tell you how i trade divergence now let us take a few examples of divergence but before that let me tell you that there are two different types of divergence that is the bullish divergence and the parish divergence now the bullish divergence is always found at the oversold level and the bearish divergence is always found at the overbought level so when we need to find a bullish divergence we have to look for this level which is level 30 and is called as a oversold level and when we have to look for a bearish divergence we have to look for this level which is level 70 and it is called as a overbought level so now let us first take a few examples of bullish divergence and then we will take some examples of bearish divergence so always remember that for finding bullish divergence you have to cut you have to look for this level which is level 30 or oversold level so in case of bullish divergence you will see that the price creates lower lows and the indicator opposes it and does not create any new lower low and create a new higher low instead telling us that there is something wrong in the market and the price then moves up now let us try to find some more examples of the same okay so over here the price is created lower low but when we compare it with the indicator you can see that it created high low and then the price moved up then the same thing happened over here the price created a lower low a slight lower low but then when we compare it with the indicator it created a higher low telling us that there is something wrong in the market and so the price moved up then the same thing happened over here too here the price is creating lower lows if you can see the price is creating continuous lower lows but the indicator is not agreeing with it and creating higher lows instead so this is a bullish divergence and then the price moved up now let us take a few examples of bearish divergence so for bearish divergence you have to look for this level which is the overbought level that is level 70 in this case now the settings may change from time to time but for now the robot level is level 70 on the rsi indicator now if you see the price here created higher highs a series of higher highs but when we compare it with the indicator it created lower high instead telling us that the indicator and the price are not aggregate because there is something wrong in the market and so the price moved down now the same thing is happening over here the price is creating higher highs but the indicator does not agree and it creates lower highs and so this is a divergence now divergence doesn't always work and this is a perfect example of this because the price here is diverging but it still isn't moving down now we will talk about this further in this video but for now let us focus on finding some more examples of bearish divergence so over here you can see if we zoom in the price created higher high but when we compare it with the indicator it created a lower high and then the price moved down so this is how you find divergence now that you have understood what is rsi the settings and the divergence let us set up the chart so that it looks like mine and then i will tell you how to treat it properly now in this strategy we will be needing two different indicators the first one is moving average that is exponential moving average and then we will be needing an rsi so for that go to indicator section over here now search for moving average exponential and then click on it twice so that two emas will be added on your chart now here again search for rsi that is the relative strength index and then it will be added over here now go to the settings of ema and then keep the length of one ema 200 and the other ema will be 50. now the ema is that as the length of the ema won't always be 150 it will change from time to time so what i mean is i usually look for a a swing movement like let us say a cycle so let us say the price has moved from year to year from this point to this point and then we can see that it is around 802 bars so what i do is i divide it by 2 and i will keep the length of 1 ema to 400 and then the other will be to 200 which is the half of the first ema and then we get a nice combination of a higher period and a lower period moving average so this is how i set my moving average when i day trade and this will also change from time to time so you can either constantly use the 50 and 100 period moving average or you can do like this you just have to make sure that after after you have set the length of the ema the price should respect the ema before you place any trades on it and this is how you will have to use ema with this strategy now the other thing is rss so to change the settings of rsi just go over here and then click on settings and then from here keep the length to 14 and then go to style and over here you can adjust the length of the bands as uh or the levels as per your need so if there is a bullish market then you can keep the length of the lower band to 40 and the upper band to 80 and if there is a bearish market then you can keep the length of the lower band that is 2 level 20 and the upper band to level 60 and if that is a bearish market then you can keep the length of the low band to level 20 and the upper band will be 60. so this is how you have to change the settings of rsi or if you
wish you can also use the five percent rule which i told you earlier now that you have your charts ready let us see how to trade it so let us first address the major issue with divergence where everyone has a problem so the major problem with divergence is that sometimes the rsi keeps on diverging and the price does not reverse at all and this single thing can cause you a lot or a losing streak so let me show you an example of that and then we will move on further now let's take a couple of examples to see how the divergence fail and what should you do about it so if we see at this level which is oh yeah so yeah the price created the that is the price created a higher high but if we compare it with the indicator it created a lower high instead telling us that there is something wrong in the market so let us say you enter a trade at this level and keep your stop-loss a few pips let's say above this resistance area so this time what happens is the price is diverging but the price haven't reversed yet so it will stop you out and then the price will just keep on diverging and it will still continue to move up now we have the same example over here let us say so from here the price created high high but the indicator opposed it and created a low high but the price did not moved down and it just kept on diverging and the price continued to move up so this is how divergence sometimes give false indications and this can trap you out and lose a lot of money because it will keep you in hope because the price still keeps on diverging and still nothing happens so this will make you lose your account if you don't use a stop loss and so always use a stop loss now the reason why this happens is divergence just tells us that the momentum is shifting toward the sellers like in this case the divergence is telling us that the momentum is shifting towards the sellers that is the price is overbought but we don't have any important area from where the seller can enter so we have to always look for important areas while finding divergence and the other thing is the price is if you look at the chart the price is uptrending and if we enter a sell trade over here and expect it to drop down then we are on the wrong side of the market because the price is moving up so we always have to look for look to be with the trend and look for buying opportunities so if we look for a sell trade over here thinking that there is a divergence then it will fail because there is no important area and also the overall trend is up now let us see why does it happen and what can you do about it so here is the thing you have to understand that rsi is just a momentum oscillator and tells who or which party has the momentum but in trading momentum is just one important aspect and the other one is the important area or a good average price because i won't care where the momentum is shifting to if there is no important area or an average price which makes sense to me so it is very important for us to have the momentum as well as an important area or average price so always use divergence with an important area or a good average price and there are various ways to do it like i use major support and resistance areas for it and moving averages when i trade divergence in a trending market so let us go to the chart and see how to use it and how to trade divergence perfectly so there are different ways by which i trade divergence because uh i trade differently for day trading and i trade differently for swing trading and there are different setups involved in it so first let us see how i take my day trades so the time frame which i use for day trading is from 15 minutes to one hour and in this chart we will be using 30 minutes time frame so the first thing is i like to change the settings of all the indicators which i am using and adjust it as per the current market situations so first let us see how i change the settings of the ema's so for that i have already told you that i use the length of ema as per the cycles that means i will see the what is the length of the cycle which will be from this point to a new high a new high above this which will be over here somewhere near here and so we get around 810 bars so the higher moving average will be 400 and the lower moving average will be 200 then now after that the next thing which i will do is i will use the five percent rule on the rsi so you can see i have marked a line over here which gives me the settings of my rss which will be around 26 or 27 so let us adjust it now let us put it in the settings which will be 20 6 or 27 whichever is good so now we have our settings done now what i do is along with the moving averages and rsi i also use the minor support and resistance areas and i will tell you how to do that but before that i want to tell you that the main the most important thing to avoid the fake divergence is to always be with that and never oppose the time like especially when i am day trading i don't try to find reversals i only look for continuation opportunities so let us see how i do it so after we have set up our chart let us say at this point we got to know that the market is now trending up because this was the downtrend then from year to year we set up the ema and then we know that the market is trending so this moving average will act as a support so right over here we have an example of how i use the minor support area to take trades now for those who haven't watched my series of support and resistance can check it out by clicking the i button so after i have drawn this support what i do is i find or i look for divergence so in this case if we see here the price created a lower low if we zoom in you can see that the price created a lower low but here the indicator opposed it and it created a high low instead telling us that there is something wrong in the market and so i would enter a long trade over over here and i will keep my take profit just somewhere near here and my stop loss will be a few pips below this now again let us see how i use moving average to take trades so after that the price moved up and then over here you can see the price created lower low at this point and the price is nicely touching the confluence area i call this the confluence area or the value zones using the two moving average and i only enter when the price has entered this area which is between the these two moving average so you can see the price drop down till this level and then when we compare it with the move uh with the rsi it created a high low so there was a lower low over here but the price uh the rsi is creating a higher low telling us that there is something wrong in the market so we will enter over here at this point when the divergence is formed and our target will be just a few webs below this and a stop loss will be such that you can at least achieve one is to two raise to reward ratio so i will just keep it something like this so by this you can easily achieve a raise to reward reach of at least one s2 2 or even more if you are if you have mastered this technique so this is how i take entries using this strategy now let us see how to use divergence for swing trading so i basically use only support and resistance while i swing trade and i do it on time frames higher than four hour or at least on four hour time frames so basically what i do is the first thing which i do is i mark the support or resistance zones and i try to be with the trend so here you can see on this chart that is called for our chart the price was moving up and it was uptrending so from here the price got rejected twice and thrice so this level was acting as a support so when the price came till this level you can see the price created a lower low if we zoom in we can clearly see that the price created a lower low but when we compare it with the indicator it did not create any new lower low and it created a higher low instead telling us that there is something wrong and so we would enter over here we would put uh entry will be over here and then you can either and for the stop loss you can keep 20 to 30 pips below the zone and the take profit will depend on what you want to do so what you can do is you can adjust take profit as for different situations so you can either put the take profit till here till this resistance area or and enclose half of your profit over here and then keep the other floating by that you will be able to catch the whole swing which is from this level to this level now let us take another example so here you can see the price was rejecting this area and then it was moving down but then it finally broke above it and then it again dropped till this this level telling us that this is a support an important support area so at this point you can see the price was creating lower lows but when we compare it with the indicator the indicator was creating a series of higher lows hence telling us that there is something wrong in the market and so if we enter over here a stop loss would be a few pips that is at least 30 webs below this zone below this zone because we are swing trading so it should be a wide stop loss and our stop loss our first take profit will be a few pips below this resistance level because the price can react to it and come down or you can also adjust it as per your needs that is you can take some profit over your let's say 40 to 50 of the profit over here and then keep the other one floating so that totally depends on you and by doing this you will be able to catch this entire swing move at least till this level now let us take one more example so from here the price moved up till this level and then it again drop till this support area so here you can see the price created a divergence it created a low but here the price is creating a high high low so you will enter over here your first take profit would be somewhere near this level this level and your stop loss will be a few pips that is at least 30 pips below this level now again over here this is a nice support area because this was a strong resistance because the price dropped almost 15 percent from here 12 percent to 15 percent from this point and then price again moved up and got passed at this time so here the price then was re-testing it here the price created a lower low but when we look at the indicator like this was a lower low but when we look at the indicator it did not create any new lower low and it created a high low instead so we will enter over here after the divergence is formed and then keep our stop loss 30 pips below this and our take profit a first take profit which is let us say 50 of your position will be exited till this level and then you can keep the rest floating so this is how i swing trade using divergence so this is how i trade divergence effectively and i want to tell you that strategy is not everything in trading it is just a small part of it and to thrive in trading you need to create a proper mindset and only that proper mindset will help you thrive in any kind of market in any kind of conditions so while you work with the strategy be sure to work towards your mindset i wish you all the best with your trading and i hope you have enjoyed this video and if you did make sure you hit the like button and also very soon i am going to start a moving average trading series so do not forget to subscribe to this channel and turn on the notification bell so that you don't miss out on those videos thank you so much for watching
2021-07-01 06:44