Subject

RSI Divergence


Student's Question

Is this a proper example of divergence on the eurjpy 4H chart? If yes, would I take from this chart that the downward momentum is weakening, and to just tighten my stops, and not to put any new short trades on at this time? Is this all I would get from the chart, or is my next plan of action to see if I get a candle formation, or trend line break that suggests a buy?


Power Course Instructor's Reply

Yes. This would be an example of divergence...price is making a new low while the RSI is not. You are correct in saying this indicates that downward momentum is subsiding. Given this scenario, some traders would tighten their stops, some may elect to close out a portion of their shorts right now and tighten the stops on the remainder while others might cover (close) all of their positions right now.

To gain more from this chart, personally, I would check out two other charts on this pair: the Daily and the 1 hour. What I am looking for is how is this 4 hour chart playing into the direction on the Daily...or is it? Then, what does the 1 hour look like...is it coming into line with the Daily? Looking at multiple time frames on a pair will provide a more complete view of exactly where the pair is in its overall trading cycle.

Keep in mind that we want to trade in the direction of the trend on the Daily chart as these will be our highest probability trades.

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