Forex Technical Analysis Articles - Ranging Indicators / Oscillators - Relative Strength Index - Divergence

Technical Analysis

1. Introduction

2. Construction

3. Overextended Currencies

4. Extreme Levels

5. Divergence

6. Ex. of Ranging Market

7. Ex of Ranging Market Cont.

8. Conclusion

A popular method of analyzing the RSI is to look for a divergence. Divergences are an indication of impending reversals. Look at more examples of divergences here using another popular indicator - Stochastic.

A Bearish Divergence occurs when the currency pair is making new highs (green ellipse in the right figure), but the RSI is failing to surpass its previous high (blue ellipses).
A Bullish Divergence occurs when the currency is making new lows, but RSI fails to surpass its previous low.

Divergence and a Failure Swing

A confirmation of the impending reversal will be the completion of a failure swing.

Failure swings are also known as support or resistance penetrations or breakouts.
During a failure swing, the RSI surpasses a previous high (peak) or falls below a recent low (trough). Figure 5 has a failure swing labeled.

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