RSI Divergence: Spotting Reversals Before They Happen

RSI divergence is one of the most reliable technical signals for identifying potential trend reversals. When price and RSI move in opposite directions, it often signals that the current trend is losing momentum.

Types of Divergence

Bullish Divergence

Price makes lower lows while RSI makes higher lows. This suggests selling pressure is weakening and a reversal up may occur.

Bearish Divergence

Price makes higher highs while RSI makes lower highs. This indicates buying pressure is fading and a downward reversal may be coming.

How to Trade Divergence

1. Identify a clear trend (you need a trend to reverse)
2. Look for divergence between price and RSI
3. Wait for price action confirmation (candlestick patterns, break of structure)
4. Enter with stop beyond the recent extreme
5. Target previous support/resistance levels

RSI Settings

• Standard setting: 14 periods
• Shorter periods (7-9) for more sensitive signals
• Longer periods (21-25) for smoother, more reliable signals

Important Considerations

Divergence can persist before price actually reverses. Always wait for confirmation and use proper risk management. Divergence works best at key support/resistance levels and in ranging or weakening trends.