Finding Bullish Divergence RSI on a chart will give you insight and potentially a better entry on a stock chart. RSI is one of many momentum indicators that many traders use, so let’s look at finding divergence using RSI and see how you can apply it in the real world.
A disagreement between momentum and price can be a dangerous situation for traders. It can be akin to the goose that lays the golden egg for seasoned traders. If you got it and can spot it, you can profit.
That is, of course, if you know what to do with the goose when you have it. Luckily, this golden egg of opportunity is reflected in several different patterns. Today, I will focus on one form of disagreement, the bullish divergence RSI.
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Table of Contents
Bullish Divergence RSI Introduction
A bullish divergence RSI occurs when the stock makes a lower low while the RSI forms a higher low. RSI doesn’t confirm the low and shows momentum is strengthening. The RSI, or Relative Strength Index, is a momentum indicator. You can apply this strategy to lower indicators, like MACD or the Money Flow Indicator.
There are many tools and indicators traders can use for stock trading. Identifying momentum is an integral part of trading the stock market.
However, when adding tools and indicators to help you, you don’t want to saturate your charts. Over-saturated charts are messy and hard to read. As a result, you can miss moves. And no one wants to miss a good move!
Some people don’t want any indicators on their charts. These are typically price-action traders. However, when you find a good balance of indicators, you can trade things like the bullish divergence RSI.
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Understanding Momentum
To better understand bullish divergence RSI, you need to understand momentum. If you remember the most recent roller coaster you rode, it wasn’t the engine that got you up and over the steep hill; it was momentum.
You know the feeling. It’s the slow start out of the gate, up to the first hill, then boom, and the first drop happens. You start picking up speed, and suddenly, you scale that steep incline without a breeze. Suddenly, you drop and rise again, seamlessly navigating the circular, puke-enticing loop. All the while secretly cursing your kids who talked you into this and the person who invented the ride – they didn’t have your best interests in mind.
Luckily, incidents of injury with roller coasters are rare in the real world. Typically, the coaster stays on the tracks.
This may shock you, but there’s no engine or steering in a roller coaster that keeps you on the track. Nope, you can thank Momentum for that.
However, you’re in trouble if something slows your momentum – like a broken cable or loose bolt. Instead of seamlessly navigating around the corner, you fly straight off the tracks.
Becoming a Momentum Trader
Now, you’re probably wondering, Ali, what does this have to do with trading stocks? Well, a lot. Because if you don’t understand momentum, you can quickly run off the tracks.
If you forgot, momentum traders seek stocks that are moving significantly in one direction with high volume. These traders attempt to ride the momentum train – or roller coaster to the desired profit.
The stock price can go up like a roller coaster climbing a hill, but it can quickly reverse if you don’t notice the signs.
So, for today, we’ll look at how divergence in momentum and price can tell you about trend direction.
Now, before you forgo roller coasters for the rest of your life, the odds of dying in a roller coaster accident are relatively slim.
According to a report from the National Security Council, thrill seekers have about a 1.5-in-a-million chance of even being injured on one. But in the trading world, it is high.
Momentum traders can use the bullish divergence RSI to their advantage. Check out our courses to learn more.
RSI Oscillator
Like a roller coaster, the rise and fall degree shows the momentum’s strength. Or the length of the short-term price swings. Strong momentum equals a sharp increase in price action.
Think of the roller coaster at Takabisha at 121 degrees – this is not for the faint of heart. Weak momentum, on the other hand, is just the opposite. Think of the Barnstormer at Walt Disney World.
All the ride talk aside, momentum in the trading world is significant. As an oscillator, it smooths out price action to give you a clear signal if it’s the right time to enter a trade. One of the most common momentum oscillators is the RSI.
RSI is the average gain of up periods during a specified time frame divided by the average loss of down periods.
Usually, it’s over 14 trading days, and the resulting number will tell us if a reversal is imminent. It’s a powerful indicator that the savvy day trader should heed.
It measures on a percentage scale from 0 to 100 and is most advantageous when you can’t see a clear trend in a company’s stock. In most instances, this would be a stock trading horizontally or sideways.
For each price upswing, there is a corresponding upswing in RSI. When the price swings down, the RSI also swings down.
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What Does the RSI Percentage Mean?
A divergence looks for a disagreement between technical indicators and price action. A bullish divergence RSI happens when the RSI moves higher while the price moves lower.
RSI > 70% = Overbought
What does this mean? The stock is overbought and is trading near the top of its high-low range. Thus, it primed for a reversal in the down direction.
How do we capitalize on this? This could be a great time for a short entry. Alternatively, it’s time to exit your position if you’re long in the stock.
RSI< 30% = Oversold
What does this mean? The stock is oversold and is trading near the bottom of its high-low range. Thus, it is primed for a reversal in the upward direction.
How do we capitalize on this? This is a great time to enter on the dip buy. Check out our list of penny stocks for potential dip buys.
Does Price Agree With Momentum?
The study of momentum checks whether the price and the indicator are going in the same direction. Do they agree or disagree?
In its simplest definition, divergence is a disagreement between a technical indicator such as RSI and price. Price is not going in the direction it “should,” according to the indicators.
Here’s an example below of a case where the price is rising – quite steeply, for that matter, but the RSI is not. In this example, the RSI is only around 60%. The stock pulls back, starts to trade sideways, and reaches new support of approximately $37.
Good To Know: Technical traders generally use divergence when the price moves in the opposite direction of a technical indicator. Click here for our trading service.
Spotting Divergence
I’m happy you spotted it because it will help you immensely. We make the most profits when we spot divergences and act accordingly.
If you are about to trade to the long side when the price is trending up, but the RSI or MACD (another oscillator) disagrees, it’s a hard no. Do not enter the trade.
However, if you prefer to short like me, spotting divergence in a case like this is money in the bank. The golden goose has arrived.
Similarly, if you’re in a trade, exit now, take your money and run. Because a divergence means a high probability that something will happen, perhaps it’s a trend or price reversal.
In the trader world, this could be called a price retracement. In some cases, it’s not a full reversal but a sideways trend, such as the case of Chesapeake Energy (CHK) above.
What Is RSI Buy Signal?
The RSI is a technical indicator that measures the current price strength of previous stock prices. It can also show when a stock is overbought or oversold.
What Is a Bullish Divergence RSI?
A bullish divergence is the opposite of bearish indicators. They occur when prices reach a new low, but the oscillator reaches a higher bottom or lower than previously. These bullish divergences are often the best signals of an impending sharp rally.
Not all technical indicators have a standardized extreme range as RSI does. However, the excessive ranges on RSI make it a useful indicator for this analysis.
The example below is a bullish divergence. The RSI setting higher lows identifies it in the lower extreme range (>30%) while the market is making lower lows.
Learn how to identify these turning points so you can turn a profit.
A bullish divergence is an excellent timing signal for traders to go long in the market or to buy call options. In either case, the signal has given you valuable information.
Similarly, if the bullish divergence occurs with the RSI below 30, bearish or short investors will start controlling their risk and market exposure more closely. In either case, the signal gives you valuable information.
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Key Take Aways
- Momentum indicators include the relative strength index (RSI) and MACD
- The length of short-term price swings measures price momentum
- Steep slopes with a long price swing represent strong momentum
- Weak momentum has a slight slope and a short price swing.
- Divergence—the disagreement between indicators—can significantly affect trade management.
- Divergences can happen to trigger trades in both direction
- A bullish divergence RSI occurs when the RSI is making higher low
- Technical traders generally use divergence when the price moves in the opposite direction of a technical indicator
Final Thoughts: Bullish Divergence RSI
Unfortunately, I hate to tell you this; there’s no magic secret. No golden goose is laying a golden egg.
It takes time and dedication, but learning professional-grade trading skills can have a life-changing effect.
So, if you’re ready to work, learn, and put the time in, we can show you how to make money in any market, whether going up, down, or sideways. Check out Bullish Bears stock training today!
