How To Trade - RSI Indicator for Classic Bullish and Bearish Divergence Trading Setups

Classic divergence is used as a possible sign for a trend reversal. Classic divergence is used when looking for an area where price could reverse and start going in the opposite direction. For this reason classic divergence is used as a low risk entry method and also as an accurate way of exit out of a trade.

• It is a low risk method to sell near the top or buy near the bottom, this makes the risk on your trades are very small relative to the potential reward.
• It is used to predict the optimum point at which to exit a trade

There are two types:

1. Classic Bullish Divergence
2. Classic Bearish Divergence

Classic Bullish Divergence

Classic bullish divergence occurs when price is making lower lows (LL), but the oscillator is making higher lows (HL).

Classic bullish divergence warns of a possible change in the trend from down to up. This is because even though the price went lower the volume of sellers that pushed the price lower was less as illustrated by the RSI indicator. This indicates underlying weakness of the downward trend.

Classic bearish divergence

Classic bearish divergence occurs when price is making a higher high (HH), but the oscillator is lower high (LH).

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Classic bearish divergence warns of a possible change in the trend from up to down. This is because even though the price went higher the volume of buyers that pushed the price higher was less as illustrated by the RSI indicator. This indicates underlying weakness of the upward trend.