today I'm revealing a
simple high win rate rsi divergent strategy I'm using a combination of three indicators
the rsi 200 ema and the stochastics but first the main indicator that I want to
focus on is the rsi because that will generate our entry signal for the
strategy instead of using the rsi as an overbought and oversold indicator we
are instead using it to find hidden divergences so let me give you a quick
explanation on what a divergence is during a normal setup if prices are heading
in a certain direction usually, the indicator will also follow that same
direction in this case the price made higher highs and the rsi also made higher
highs however there are instances where the indicator is moving in the opposite
direction of the price instead like in this example the price made lower highs
but the rsi made higher highs this is called a divergence there are two types
of divergences a regular divergence and a hidden divergence but for this
strategy specifically
we are only going to be using hidden divergences a hidden
divergence is a type of divergence that signals a possible continuation of an
existing trend and there are two types of hidden divergences a bullish hidden
divergence which forms when prices are making higher lows but the rsi is making
lower lows and a bearish hidden divergence which occurs when prices are making
lower highs but rsi is making higher highs so let me show you an example of what
a bullish hidden divergence looks like in this chart we spotted an existing
uptrend as prices are heading upwards while the rsi is also heading upwards
next, we can see that the price made a small pullback now if you're looking at
this chart with the naked eye you may think that this pullback is signaling a
possible trend reversal however if you look at the rsi you can actually spot a
bullish hidden divergence as prices made higher lows but the rsi made lower
lows
this signals a possibility that the uptrend may continue
instead and as you can see the hidden divergence predicted the trend
continuation perfectly now let's look at an example of what a bearish hidden
divergence looks like in this chart we can see that the price is heading
downwards while the rsi is also heading downwards then when the price made a pullback to the upside we spotted a bearish hidden divergence as prices made
lower highs but the rsi made higher highs this signals a possibility that the
downtrend may continue instead and as you can see the hidden divergence
predicted the trend continuation perfectly
now of course what I just showed you are just ideal examples
when you're trading real-time spotting these divergences may be a bit hard so
that is why I'm going to show you a simple trick that you can use to identify
these hidden divergences in real-time but first to make the price easier to
look at you want to switch your chart to a line chart so the first step is you
want to know what kind of divergence are you looking for are you looking for a
bullish hidden divergence or a bearish one and the way we determine that is by
using the 200 ema so if the price is above the 200 ema you only look for
bullish hidden divergences and if the price is below the 200 ema you only look
for bearish hidden divergences so for this example let's say that the price is
above the 200 ema meaning we only look for bullish hidden divergences and this
is how you do it
the first step is you want to look at the rsi and identify
the latest swing low then you place a horizontal line at the swing low of the
rsi and the same swing low of the price next you want to wait for a setup where
the rsi crossed below the line but the price hasn't this shows us that the
price is still on a higher low but the rsi made a lower low and so this will be
our bullish hidden divergence now let's try to find bearish hidden divergences
first, you want to make sure that the price is below the 200 ema next you want
to look at the rsi and identify the latest swing high then you place a
horizontal line at the swing high of the rsi and the same swing high of the
price next you wait for a setup where the rsi crosses above the line but the
price hasn't this shows us that the rsi made a higher high and the price made a
lower high and so this will be our bearish hidden divergence
now an important rule that you need to remember when trading
divergences is you cannot simply take a position just because a divergence
appears because it doesn't guarantee that the continuation pattern will form
that is why you need to use another indicator to further confirm your analysis
and you can do that by using the stochastics and 200 ema rsi and stochastics combination so
this is how the strategy works the first step is you want to look at the
position of the price, in this case, it's above the 200 ema meaning we're
searching for bullish hidden divergences
however, once you've spotted the divergence you don't want to
take any positions yet you need the stochastics to further confirm the signal
by waiting for it to cross over upwards once this happens you take a buy
position let's look at another example in this chart we can see that the price
is below the 200 ema meaning we only look for bearish hidden divergences once
you've spotted the divergence the next step is we want to further confirm the
signal by waiting for the stochastics to cross over downwards once this happens
you take a sell position now for your exit strategy if you took by positions you
want to place your stop loss below the nearest swing low and set your profit
target at 1.5 times your stop loss and if you took cell positions you want to
place your stop loss above the nearest swing high and set your profit target at
1.5 times your stop loss
so now let's look at the full strategy in action and again
I'm going to switch to a line chart to make the price easier to look at so we
can see that the price is above the 200 ema meaning we're looking for bullish
hidden divergences and to do that first we want to look at the rsi and identify
the nearest swing low next we place a horizontal line at the swing low of the
rsi and the same swing low of the price then we want to find a setup where the
rsi crosses below the line but the price hasn't and so this will be our hidden
divergence the next step is we want to further confirm the signal by waiting
for the stochastics to cross over upwards once this happens you take a buy
position then you place your stop loss below the nearest swing low and set your
profit target at 1.5 times your stop loss and as you can see the price hits our
profit target and so this counts as a successful trade
let's look at another example in this chart we spotted that
the price is below the 200 ema meaning we're looking for bearish hidden
divergences so first we want to look at the latest swing high of the rsi and
place a horizontal line there and the same swing high of the price then we want
to wait for a setup where the rsi crosses above the horizontal line but the
price hasn't and so this will be our hidden divergence and again we want to
further, confirm the signal by waiting for the stochastics to cross over
downwards once this happens you take a cell position next you place your stop
loss above the nearest swing high and set your profit target at 1.5 times your
stop-loss and as you can see the price hits our profit target and so this
counts as a successful trade so I just revealed to you a simple rsi divergent
strategy that you can immediately use right