Published on: March 4, 2025
In trading and investing, it’s not about being right or wrong; it’s about having an edge, a consistent process that gives you an advantage in the long run.
Technical analysis is a vast subject but finding the right theory and creating an edge separates you from others. One such edge we are going to discuss in this blog is the use of RSI Divergence in your trading strategy. Many traders are familiar with the concept of RSI Divergence on the candlestick chart, and many of you may have already used it to improve your trading performance. But if you’re looking to take your success to the next level, combining RSI Divergence with the power of the Noiseless Chart—specifically Point and Figure (P&F) charts—can give you a sharper, more strategic approach to your trades. In this post, we’ll explore how this fusion works and how it can help you fine-tune your trading strategy.
Understanding RSI Divergence: The Four Key Types
RSI (Relative Strength Index) divergence is an essential tool for identifying potential reversals in the market. Divergence happens when the price movement of an asset and the RSI indicator move in opposite directions, suggesting that a trend is weakening and may soon reverse. There are four types of RSI divergence that you need to be aware of:
1. Bullish Divergence
Bullish Divergence occurs when the price makes a lower low, but the RSI makes a higher low. This situation indicates that selling momentum is waning, suggesting that a potential reversal to the upside may be near. Traders use this pattern to identify possible buying opportunities, as it signals that the downward trend might be losing steam.
2. Bullish Hidden Divergence
Unlike the regular bullish divergence, Bullish Hidden Divergence occurs during a pullback in a strong uptrend. The price makes a higher low, but the RSI shows a lower low. This suggests that the uptrend is still intact, and the price might soon continue its upward trajectory after the pullback. It’s a continuation pattern, rather than a reversal, and can offer traders an opportunity to enter positions in a trending market.
3. Bearish Divergence
Bearish Divergence happens when the price makes higher highs, but the RSI makes lower highs. This indicates that buying momentum is weakening, and the market may be setting up for a reversal to the downside. Traders use this pattern to identify potential selling or shorting opportunities.
4. Bearish Hidden Divergence
Bearish Hidden Divergence is the counterpart to Bullish Hidden Divergence and occurs during strong downtrends. In this case, the price makes a lower high, while the RSI makes a higher high. This suggests that the downtrend is likely to continue, and traders can use this pattern to identify potential selling opportunities in a strong bear market.
Scanning for Divergence Patterns
Traditionally, scanning for divergence patterns could be a time-consuming task, but with modern tools like the Definedge platforms (TradePoint and RZONE), this process is much quicker and easier. These platforms allow you to scan for bullish and bearish divergence patterns in just a few clicks. By using such platforms, you can quickly identify stocks that qualify for divergence and potentially catch profitable trades before the market fully shifts..
For instance, on the Nifty50 daily chart, you can easily spot stocks exhibiting Bullish/Positive Divergence, giving you early signals of potential uptrends.
Taking it a Step Further: Combining RSI Divergence with Noiseless Charts
Now, let us take this strategy a step further by combining RSI Divergence with the Noiseless Chart, specifically the Point and Figure (P&F) chart. The beauty of the P&F chart is that it removes noise from price action, focusing only on significant price movements that show a true change in market direction. This makes it a powerful complement to RSI Divergence.
Let us consider Coal India as an example. On the OHLC chart, we observe a Positive Divergence, suggesting that selling pressure is weakening. However, the real confirmation comes from the Point and Figure (P&F) chart, where we see a Bull Trap followed by a Bullish Breakout.
This combination of RSI Divergence on the OHLC chart and the Bull Trap and Breakout signals on the P&F chart creates a strong confirmation of a reversal trade. While RSI Divergence alone can suggest a reversal, the clarity and precision provided by the Noiseless Chart add another layer of confidence in the trade setup.
Why the Combination Works
While RSI Divergence can give you an early heads-up about potential trend reversals, it is not always foolproof. Sometimes, the market can give false signals or move in ways that seem counter to the divergence pattern. That’s where the Point and Figure chart comes into play. By eliminating price “noise,” the P&F chart allows you to focus only on the most important price movements, making it easier to spot reliable breakouts and trend changes.
Combining the RSI Divergence and the Noiseless P&F chart significantly increases the probability of success in your trades. The P&F chart provides additional confirmation and clarity, allowing you to trade more confidently and precisely.
