If you have traded Forex for very long you will have read about divergences. Divergences are important because they tell the trader something has changed between price and momentum and that price is moving against the trend. However if you have researched further you will find that there are also reversals. Reversals are important because they tell the trader that price and momentum are beginning to gather to be traded with the trend. Here you will learn about both and how you can track them automatically on as many currency pairs as you wish and on any time frame using The RSI Paint Indicator.
Here is the definition of a bullish divergence from a leading Forex website: If the price is making lower lows but the oscillator is making higher lows, this is considered a bullish divergence. And a bearish divergence: If the price is making a higher high but the oscillator is lower high, then you have a bearish divergence. Divergences are function of price and momentum and located on RSI, a leading indicator.
These two divergences are best used when a current trend is retracing although many books will tell you they are signals for trend reversal. This trader has done extensive statistical research on bullish and bearish reversals and found that divergences do not signal a trend reversal in most cases. This is the conclusion also shared by many leading RSI traders; Cardwell, Hayden, Bayens, Brown and others.
Now, that is only half of the story. There are two other signals very similar to divergences called Reversals. Reversals tell a trader that momentum has swung in favor of the trend. This is a much better way to trade because a trend continuation has market strength behind it then a retracement meaning more pips and more profit. Reversals are the key to successful trading. Statistically they are much more productive in terms of profits per trade.
The RSI Paint Indicator
Divergences and reversals can be drawn manually but this is tedious and for the beginner it makes the learning curve much longer. The RSI Paint Indicator is an indicator that takes a basic RSI indicator like the one used on any charting package and “paints” all divergences and reversals on the RSI chart in four different and distinct colors.
Once the trader can see the actual divergences and reversals on the chart, he or she can begin to make use of how to take advantage of momentum changes in the market. Currently the RSI Paint Indicator works on MT4 (Metatrader) which is the most popular trading platform offered by many brokers in the Forex market.
By learning how to track divergences and reversals the Forex trader can find momentum changes on multiple currency charts automatically and then decide which one to trade. Each time a divergence or reversal occurs on a chart and alert is sent to the computer, email or cell phone depending on the trader’s preference.
These unique trading signals are used by many experts to trade the markets because they are mathematically located on charts and are not interpreted. This means they are objective. More can be learned about RSI by reading the eBook, RSI Fundamentals; Beginning to Advanced.