Divergence: A Retrospective

2023年3月6日

Divergence Trading is lucrative as the price movement following a divergence is with high momentum, hence rewarding with decent Risk:Reward.

The common way is to add conventional RSI and check for divergence. However we often found that many of the vanilla RSI divergence signals are conveniently ignored by the following price action.

Then the question is: Does RSI divergence fakes out? OR with the confluence of something other stuff we can more accurately identify these sorts of divergence and hop into it happily with lucrative Risk:Reward.

Potentially the Volume Profile (more specifically: The Fixed Range Volume Profile) identified high liquidity zones (classical term: Point of Control, PoC) are the area where one should look out for a potential RSI divergence.

We have picked up the USDINR last 5 months Daily chart and followed this analysis tecnique:

Analysis Methodology:

• Use Daily (or something like hourly/4-hour etc.) normal candlestick.
  
• Identify the swings in the chart (high, lows).
  
• For each swing, apply Fixed Range Volume Profile free TradingView indicator (available under Technicals > Profile, 2nd from top)
  
• The PoC (Point of control) is visible in the chart. You may mark it in the chart with a horizontal line (or a rectangle). That's the liquid-most zone.
  
• If you see some other areas other than PoC area (technically called Value Area) are showing decent liquidity (comparable to PoC, say within 60% of PoC), then mark that area also with a horizontal line.
  
• Add a RSI. Cleanout everything other than just the RSI line chart.
  
• Change the main price chart from normal candle to line chart.
  
  
• Once you see the price is in the high liquidity zone, check the price and the RSI together. See if there is a divergence.
  
• Positive/Bullish Divergence: Price is making a lower-low, but corresponding RSI levels are not making lower-low (either same or making higher low).
  
• Negative/Bearis Divergence: Price is making higher-high, but corresponding RSI levels are not making higher-high (either same or making lower high).
  
• Hidden Divergence: No need to consider too much. Spotting a normal RSI divergence is good enough.
  

That's it. Once you find out the divergence, take a Positional Trade in the opposite direction of trend. (means +ve divergence Long / -ve divergence Short). Hold it with the SL of the Highest Point of the high liquidity zone (which you have marked earlier) and ride the reversal movement with trailing the stop loss.

In last 5 months USDINR, we can see it happened at least thrice. So it's powerful. Lesser number of quality trades.