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Intraday RSI Divergence Setup

pipMonster's picture

This is a setup I call the RSI(14) divergence setup. It consists of all the usual things we do as traders to prepare for the trading day except when it comes to the 5-min chart with an RSI(14) indicator applied.

We start with the top down approach to analyzing the charts. This means we start with the daily chart and drill down into price action. We'll use daily, hourly(60-min), 15-min and 5-min charts. Start by opening the daily chart and marking horizontal S/R levels close to current price. Next, apply fib retracement to the chart. These are our long range S/R levels and can be quite powerful for price reversals.

Open the 60-min chart and apply the daily pivots indicator. Make note of the dominant trend direction. Mark off round numbers as a reminder if necessary. These are very powerful S/R levels.

The 15-min chart is there for monitoring price action once the trade is initiated. It gives us a wider view than the 5-min entry chart.

On the 5-min chart apply an RSI(14) indicator with 70/30 levels marked. These represent for lack of a better term 'overbought' and 'oversold'. What we look for in the chart is a divergence between price action and indicator levels. The RSI must be at an extreme level or further in order for this setup to be effective. Once price has reached this extreme level, we want to see a pull back and then a lower low made in the next 1/2 hour or so. Corresponding to this lower low of price, we need to have a less extreme reading on the RSI(14). This is called divergence(see attached image). This is where you will enter the trade opposite of the current price direction. It's commonly referred to as a reversal setup.

Ideally you want the divergence to generate an entry signal at one of your S/R levels previously marked on the charts. This gives your trade the greatest probability of running to profits. The example happened at 211.00 on gbp/jpy. Always be aware of economic data releases.  I don't recommend scale out levels or where to close your trade. That is up to your trade management technique.

This setup happens day in and day out on all the pairs. Please exercise due diligence and go over several pairs like eur/usd, eur/jpy, gbp/usd, gbp/jpy, gbp/chf, usd/chf, usd/jpy, etc. Every pair nearly every day shows this setup. It's not totally mechanical and does take some discretion to use effectively.

Good trading to you all.

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