How to Trade RSI Divergence?

Let's take a look at an example of RSI divergence in action. 

In the chart below, we have the daily price chart of Apple Inc. (AAPL) with the RSI indicator plotted below: 

Bearish Divergence in AAPL

In between the month of July and September, we can see that there is a bearish divergence between the price and the RSI. The price is making higher highs, but the RSI is making lower highs. This indicates that the uptrend may be losing momentum, and a potential reversal to the downside may be coming. Traders who use the RSI divergence strategy may look to enter a short position in AAPL, expecting the price to reverse to the downside. If they were to enter a short position at the bearish divergence point, they would have made a profitable trade as the price of AAPL did indeed reverse to the downside in the following days. 

In other chart below, we again have the daily price chart of Apple Inc. (AAPL) with the RSI indicator plotted below: 

Bullish Divergence in AAPL

In the month of March, we can see that there is a bullish divergence between the price and the RSI. The price is making lower highs, but the RSI is making higher highs. This indicates that the downtrend is about to get over, and a potential reversal to the upside may be coming soon. Traders who use the RSI divergence strategy may look to enter a long position in AAPL, expecting the price to reverse to the upside. If they were to enter a long position at the bullish divergence point, they would have made a profitable trade as the price of AAPL did indeed reverse to the upside in the following days. 

Conclusion  

The RSI divergence strategy is a powerful tool for identifying potential trend reversals and momentum shifts in the market. By using the RSI indicator to identify bullish or bearish divergence, traders can make profitable trades by entering positions in the opposite direction of the trend. However, traders should always use other technical analysis tools to confirm the divergence and potential reversal before entering a trade.