A Bullish Divergence RSI signal is a powerful setup to find a reversal momentum in the market. We can apply it to any instrument, it’s straightforward.
Finding a bullish divergence RSI is simple; you just need to apply a Relative Strength Index indicator to the graph and analyze its trend compared to the price.
In technical analysis, there is an RSI bullish divergence when prices are falling and making new lows while the Relative Strength Index indicator is rising. In our variant, we used a simpler and more aim system; we will compare the intersection of two moving averages both on the price and on the RSI indicator.
In this tutorial, we will show you a simple new method that will allow you to identify divergences automatically.
You will no longer have to draw the trend lines on RSI and price to identify the divergences. With this simple system, you can also automate market entries with an expert advisor.
How to identify a Bullish Divergence RSI
Classical technical analysis rules
In technical analysis, we can identify a bullish divergence RSI through price movements by comparing them with the relative strength index (RSI) indicator.
We analyze the new highs and lows of the closing prices, correlated with the new highs and lows of the RSI.
When prices drop and creating new lower lows, but the RSI is making new highs, or it is not making new lower lows, we are facing a bullish divergence RSI.
This analysis applies to any technical oscillator and is widely used by traders.
This signal should expect a likely rise in prices. In the classic model, we draw trend lines on the price and the indicator in this way:
However, this system has some characteristics that make it challenging to apply and automate. However, here you can find our MetaTrader 4 indicator that automatically identifies divergences.
Doing a continuous analysis of many financial instruments drawing many trend lines will waste you a lot of time.
Having to identify the minimums and maximums, draw the trend lines and test the divergence is a very process. Think about the extensive work you should do looking for bullish divergence RSI on a 15-minute chart on all major currency crosses.
If you are a novice trader, you will have a lot of difficulties identifying lower low, higher high, etc.
With this analysis, you often risk entering the discretionary trading area. If you have been following us for a long time, you know that we love what we can backtest.
We are convinced that two traders with different experience, on the same financial instrument, would struggle to find the same bullish divergence RSI.
Try to find some differences on a chart yourself and ask a friend to do the same. You find that you will get partially unique signals.
This is because some divergences will be ignored and others will not be clear enough to be chosen as a signal.
Also, this analysis cannot be automated or backtested.
When you cannot backtest a strategy, you have to open a trade without knowing if, at least in the past, the strategy would have worked.
Our new method to identify the Bullish Divergence RSI
Our variant for identifying an RSI bullish divergence is elementary. It won’t have the same accuracy as the classic system, but it significantly reduces the time required to apply it.
We use the intersection of two moving averages on the price and the relative strength index indicator.
When the fast-moving average is above the slow moving average, we are facing an uptrend. If the moving averages applied to the price draw a bullish trend and the moving averages applied to the RSI draw a bearish trend, we have a divergence. That’s all.
We used a fast 5-period moving average and a slower 20-period moving average.
To make the indicator more responsive, you can use exponential moving averages, or you can shorten the periods of moving averages.
This system is much simpler to build and monitor. You won’t have to draw dozens of trend lines by hand to find any signs. You can quickly analyze dozens of tools.
Above all, you can automate the process by coding an expert advisor who opens positions when he detects a divergence.
The expert advisors should not trade automatically on this signal. Instead, use the EA to check with a backtest if this signal has an acceptable statistical probability.
We prefer to use divergences as a filter. We will use another signal to timing the entry, for example, the breaking of a maximum or a minimum of a period.
Entering the market immediately when an RSI bullish divergence occurs is wrong because the divergence may continue to widen. So remember that this strategy does not provide an entry timing, but it signals you a condition in which the market could reverse.
Insider Tips: Use bullish divergence RSI as an alarm signal and not as an input signal.
An RSI bullish divergence will be more affordable on high timeframes than an intraday one.
You can find a bullish divergence RSI in any currency pair or stock. Commodities also often experience this divergence.
Through the backtests, you can also change the periods of the two moving averages to better adapt them to the instrument used.
How to build a Bullish Divergence RSI indicator
At this point, we just have to show you how to build this indicator in the MetaTrader platform.
If you use the MetaTrader, you will already know how to add moving averages to the price and therefore, we will skip this step.
What we want to show you is how a moving average is added to the RSI indicator.
First, enter the indicator relative strength index RSI to the graph, then also add a moving average.
In the first step, we will calculate the moving average on the price and then you will see it at the top of the graph.
Select the moving average by right-clicking and select “MA Properties”.
In the “parameters” tab under “Apply to:” choose “First Indicator’s Data”.
A simpler method is to drag the moving average directly into the indicator window.
Bullish Divergence RSI with TradingView
If you don’t have a trading platform or want to analyze an instrument not present among those of your broker, you can use TradingView.com.
The procedure is effortless first add the RSI indicator to the graph, also add a new moving average. Select the moving average with the right button and click on settings.
Just choose RSI and it will calculate the data of the relative strength index indicator. However, the average will still be drawn in the price chart window. Drag it to the RSI indicator window by selecting it with the mouse button.
Our method will allow you to save time and automate the strategy. You can compare this variant yourself with the classic process.
Try to draw RSI bullish divergences with trend lines and then compare the indications with the indicator we taught you to build.
Let us know in the comments or on our Facebook page if you liked this system.