RSI Divergent Strategy Lecture Notes

Introduction

• High win rate RSI divergent strategy
• Combination of three indicators:
  • RSI (Relative Strength Index)
  • 200 EMA (Exponential Moving Average)
  • Stochastics

Focus on RSI and Divergences

• RSI is used to find hidden divergences, not just as overbought/oversold indicator.
• Divergence: When the price and indicator move in opposite directions.

Types of Divergences

• Regular Divergence
• Hidden Divergence (used in this strategy)
  • Signals continuation of an existing trend
  • Bullish Hidden Divergence:
    • Price: Higher lows
    • RSI: Lower lows
  • Bearish Hidden Divergence:
    • Price: Lower highs
    • RSI: Higher highs

Examples

Bullish Hidden Divergence

• Uptrend identified
• Price pullback observed
• RSI shows bullish hidden divergence (higher lows in price, lower lows in RSI)
  • Indicates trend continuation

Bearish Hidden Divergence

• Downtrend identified
• Price pullback observed
• RSI shows bearish hidden divergence (lower highs in price, higher highs in RSI)
  • Indicates trend continuation

Identifying Hidden Divergences in Real-Time

• Chart Setup: Switch to line chart for clarity
• Determine Divergence Type:
  • Use 200 EMA:
    • Above 200 EMA: Look for bullish hidden divergences
    • Below 200 EMA: Look for bearish hidden divergences

Steps for Identifying Divergences

Bullish Hidden Divergence

• Price above 200 EMA
• Look at RSI for latest swing low
• Place horizontal line at swing low of RSI and price
• Wait for RSI to cross below line, but price stays above
• Identifies bullish hidden divergence

Bearish Hidden Divergence

• Price below 200 EMA
• Look at RSI for latest swing high
• Place horizontal line at swing high of RSI and price
• Wait for RSI to cross above line, but price stays below
• Identifies bearish hidden divergence

Confirmation with Stochastics

• Do not take positions solely based on divergence
• Use Stochastics to confirm:
  • For buy positions: Wait for Stochastics to cross upwards
  • For sell positions: Wait for Stochastics to cross downwards

Strategy Execution

Buy Position

• Spot bullish hidden divergence
• Confirm with Stochastics crossover upwards
• Place buy order

Sell Position

• Spot bearish hidden divergence
• Confirm with Stochastics crossover downwards
• Place sell order

Exit Strategy

• Buy Positions:
  • Stop loss: Below nearest swing low
  • Profit target: 1.5 times stop loss
• Sell Positions:
  • Stop loss: Above nearest swing high
  • Profit target: 1.5 times stop loss

Conclusion

• Simple RSI divergent strategy explained
• Encouragement to like and subscribe to the channel
• Invitation to watch additional videos