Beginner's Guide For Traders About RSI Divergence Cheat Sheet ?
RSI DIVERGENCE EDUCATIONAL POST!
RSI divergence is a leading indicator and can preempt price action though divergence and patterns.
Regular divergence is identified at overbought (bearish) and oversold (bullish) levels, it signifies a reversal of trend.
Bearish regular divergence would be in an overbought area >70/80 depending on your preference, and is where price makes higher highs and RSI makes lower highs. This shows momentum is weak but price is pushing up anyway (fomo) and suggests there may not be enough momentum to move higher and a retracement is likely.
Bullish regular divergence is in oversold areas <20/30, and is where price makes lower lows and RSI makes higher lows. Similarly, this is saying that momentum is increasing but the price has yet to catch up (fud) and a reversal is likely.
Hidden divergence signifies continuation of trend.
When the price makes a lower high but RSI makes a higher high in the >50 area this shows bearish continuation. The argument here is that the price is not able to achieve higher highs despite stronger momentum and therefore is likely to continue downwards.
A bullish hidden divergence is when price makes higher lows but rsi makes lower lows in the <50 region signifying a continuation. The argument is that the price is holding its own despite the weak momentum and therefore is likely to continue upwards.
Note 1 - RSI divergence is useful but can give false signals like any indicator. On BTC (and likely others) on the 1 hour chart you may see 3 or 4 bumps of divergence before the price actually reverses. As always, indicators / patterns are much more valid on higher timeframes.
Note 2 - the divergence is confirmed through comparison of at least two peaks or two troughs. If the second peak or trough has not been confirmed then it is not yet a validated divergence.
Additionally (a personal observation) you do not need to assume the RSI will reverse in a massive way i.e. all the way back to the other end with price changing dramatically.
E.g. you may see a bearish regular divergence on the highs and assume a fall is coming, but the price may only fall as small amount with the rsi falling relatively further. I refer to this as the RSI correcting to allow itself room to continue to move up. In these instances you may also see a bullish hidden divergence appear on the lows perhaps offsetting the prior bearish regular.