As a form of technical analysis, Relative Strength Index (RSI) divergence works by defining potential reversals of a security’s current trend. It is an important tool for traders when making decisions in the forex market as it helps highlight price momentum, and more specifically, when the price momentum is about to reverse. In this article, we will discuss the basics of RSI divergence, its importance, and how to detect and trade it. RSI divergence is an analytical technique used in technical analysis to forecast potential trend reversals. It looks at the RSI (relative strength index), which measures the strength of a market trend, and compares it to the actual price movement of the market. This comparison can reveal divergences between the RSI and price action—areas where the RSI indicates weakening momentum, even as price continues to move in a given direction. These divergences suggest that the price action may not follow through and could lead to a trend reversal. RSI divergence can be used to identify potential entry and exit points in the market, as well as areas of strong support or resistance.
RSI Divergence in Technical Analysis: What it Means for Forex Trading
By Simon Cristian Jan 7, 2024