RSI (Relative Strength Index) is a commonly used technical indicator in trading that helps identify overbought and oversold conditions in the market. It measures the strength and speed of price movements and provides traders with valuable insights into potential trend reversals. When analyzing RSI, three types of divergences can be observed: regular, hidden, and exaggerated divergences.
đź“ŤRegular Divergence: Regular divergence occurs when the price and the RSI indicator move in opposite directions. There are two types of regular divergences: bullish and bearish.
đź“ŤHidden Divergence: Hidden divergence refers to a situation where the price and the RSI move in the same direction, but the RSI signals a potential trend continuation rather than a reversal.
đź“ŤExaggerated Divergence: Exaggerated divergence is a type of divergence where the RSI signal extends beyond the typical overbought or oversold levels. It suggests that the price is showing extreme momentum and could potentially experience a significant reversal.
In summary, regular, hidden, and exaggerated divergences in RSI analysis provide traders with valuable insights into potential trend reversals and continuations. By understanding these divergences, traders can make more informed decisions regarding their trading strategies and positions in the market.
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A lot of people do look for divergence signals to trade. I would have considered this for an Editors Pick if it had some real-world chart examples and suggestions of how to approach them. Thanks for sharing.
From mod @zAngus