Autotrade divergences indicator – How To (AUTO) Trade Divergences

Today we would like to share a little tip: trade RSI divergence with the Autotrade divergences indicator.

Divergence is a disagreement between a momentum indicator and price. Momentum indicators are the relative strength index (RSI), stochastics, and rate of change (ROC).

Generally, you can quickly discover the divergence with your eyes.

Fewer momentum signals something is changing. Maybe the trend reverses or consolidates.

Divergence in an uptrend occurs when the price makes a higher high, but the indicator does not. In a downtrend, divergence occurs when the price makes a lower low, but the indicator does not.

As a rule, this kind of analysis is great in a healthy trend market. So, when you identify a range market, you could stop searching for divergences.

In general, momentum indicators are useful in current trends, but it is useless in range-market phases.

Ok, It’s easy for human eyes to discover the divergence in a chart. But, how to figure out the divergence with an automated trading system?

divergence in Eurusd rsi and price

How to trade RSI divergence with an Automatic Trading System

Our little tip for you is to apply two moving averages (10 and 20 periods) to RSI and Price.

When the price’s fast moving average is over the slow-moving average, and the oscillator’s fast-moving average is under the slow-moving average, there is a divergence.

As you can see, the histogram follows the RSI direction.

rsi fast moving average crosses under slow with rising price to spot divergences

You can use the same trick with the price. The Histogram follows the two Moving Averages.

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When the fast-moving average is under the slow-moving average, the histogram becomes red and vice-versa.

Histogram follow the two moving average on price to find divergences TradeStation
RSI divergence indicator free dowload for tradestation and multicharts easylanguage coded

You have to put it all together and create an indicator that shows you only the RSI divergences.

Remember that the divergences don’t work in a range market. You could apply a trend filter to eliminate the false signals.

We can use the Average Directional Index (ADX). ADX is used to quantify trend strength. ADX calculations are based on a moving average of price range expansion over a given period.

With this ADX filter, the indicator only shows the divergence when the ADX is bigger than 20.

RSI divergence indicator in a tradestation chart download for free

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