RSI Divergence

The Relative Strength Indicator (RSI) tries to anticipate a change in the trend. This is a leading indicator of a trend change. The results are used to deliver messages about the strength of the market. It is called an oscillator because the indicator readings are converted into percentage results which range from 0% to 100%. The position of each day’s indicator reading gives the trader an indication of the strength, or weakness, of the existing price trend.

80% and above Over bought

20% and below Over sold

The over-bought and over-sold signals are the same as any oscillator, although with an RSI they are traditionally set at 80% and 20%.

In a trending market, Signals can remain above 80% and below 20% for longer period of time.

When the RSI line slopes differently from the price chart line, a divergence occurs. 

Divergence signals give the trader an advantage by confirming an entry into a downtrend as it weakens and just before it turns into an up trend. It is also used to get out of an up trend as it weakens, and before it collapses into a downtrend. The divergence signal does not occur every time a trend changes, but when it does, it delivers a strong confirmation signal that a trend break is likely.

RSI divergence signals often appear in advance of a trend change, but they are not very good at suggesting the time of a trend change.