 Hey guys, it's Emmanuel here and in this video. I'm going to be talking about the RSI Divergence strategy While making this video I'm going to make some assumptions that you know what a candlestick is that you're familiar enough with your Platform to know how to plot the indicators on your chart that you know what a trend is supposed to arrange in markets and That you can follow a simple set of rules Which I'm very sure that you can so yeah, let's get started So the very first thing you want to keep in mind is that this is a sort of like a counter trend strategy meaning you're literally taking trades against the trend and Immediately alarm bells should be going off Warning you that this is not a strategy that you can use at any random location on your chart You have to be very specific in terms of the location you choose to get involved in the market Perhaps what most people don't understand is the RSI divergence as it's Usually taught is an entry method and the last thing you want to be doing Is taking a trade or entering a trade against a strong trend again and again That's got to be a very quick way of losing all your trading capital There has to be a very good reason as to why you've chosen to take the trade after seeing the setup on your charts I'll go further into details with this in a second So in terms of the market state Component of this strategy we are looking for the market to be in a trending Environment and should have been for quite a while So remember this strategy is used to predict the end of a trend and the turning point in the market So it's critical for you to use it after the market have been trending for quite a while We do not use this strategy in a range bound market neither should you be using it at the first sign of a trend You want to wait till you feel like the trend is over extended and these are things we'll go over in this video For those who don't know what the RSI divergence is It's simply when the RSI indicator the relative strength index indicator diverges from the price action on your chart another word for divergence can be separation or part in dividing so basically doing Opposite or going in a different direction altogether to what your price action is doing So let's take a quick look at the chart to see exactly what we're talking about We've got a pretty good example right here with the market in a pretty good-looking trend pulls back Tries to continue traded above the previous. I only buy a little bit in this particular instance But on here looking at the peaks under indicator We see the indicator putting in a lower high at this peak I think I'll use the crosshairs to try to show you exactly the point So right at this high we've got a high on the indicator as well on the next high The indicator puts in a lower high At this point we can say Price is diverging in the sense that they are separating or parting from each other So let's zoom in further And discuss some of the specifics of what constitutes a divergence So what I'm going to do is make this rule based to make it as systematic as possible for the sake of simplicity If at any point you can't answer these questions with conviction Then I suggest you leave the trade alone and look for another opportunity You never risk your money or invest in anything you are not sure about Right. So rule number one Do you see a trend and does that trend have at least two higher highs in this particular setup? We can clearly see that the market is trending higher and for the second part of the question We've got at least two higher highs in this case We had three before the market topped out and gave us the divergence rule number two As price pushes higher past the previous high has the rsi made a lower high Now what most people will instantly want clarification for is whether i'm referring to the candlewick trading above the previous high or can it close and trade higher With several candles and still count as a divergence and the answer to that is Yes, it can't close and trade with a couple more candles going higher as long as the divergence continues on the indicator and I'll look for some examples on the chart to show you this later on This next rule addresses my earlier point About not taking a setup just randomly with this strategy You'd have to have a good reason to be taking the trade at a great location on your chart So the next rule is it's price at a good support and resistance level And the quick and easy way to do that is to find out what price is reacting to at this previous high And why price could be trading past it with less relative strength Giving you a clue that this move above Could be a fake a stop run manipulation or a short term move before turning around So now we simply zoom out And see exactly what price is reacting to and there We can start to see how price is held as support and then react it to as resistance Moving on to the last rule which clarifies our entries And there are two types of entries that I would like to share with you today And the first one is do you have a reversal candle or reversal candle pattern at the second peak? Forming the divergence if your answer is yes Then you can feel free to take the trade with stop loss above the high with some extra room for buffer However, it's important to keep in mind that this is the aggressive form of entry which maximizes your reward against your risk But is also the riskier of the two entries The second entry is waiting for price to break and close below the 20 simple moving average Taking the trade with stops again above the high with some extra room for buffer As you can clearly see you'd be taking a lot more risk in terms of pips However, it is the safer entry to take and as promised Here's an example of a setup with price breaking and closing above the previous high With a couple of candles before you get your candlestick reversal signals Before price ended up going lower now Let's follow the rules one by one and see if we get a valid entry as we have previously covered So remember rule number one is the market trending And as you can see we've got an uptrend with at least two Higher highs rule number two as the price pushes higher and trades above the previous high Do we have a lower high On the rsi indicator number three Is price at a support and resistance location? So let's check and there we go We've got price using this particular level as a resistance And if we go further back we see it using it support And finally Do we have our entry confirmation? The first entry is a reversal candlestick confirmation Which we have right here On this candle And the second is right here as price closes below the 20 simple moving average And here's a couple of examples of what a bullish divergence looks like And clearly we can see We are in a downtrend And as the market trades below the previous low giving us a lower low the rsi is turning upwards giving us higher lows Is this a good support and resistance location? Let's zoom out scroll to the left to find out and as you can see Price responding to that particular location And finally our entries good entry confirmations right here And when price breaks above the 20 simple moving average And that's it from me take care