RSI Bullish Divergence is often encountered by traders when trading. Here GIC will discuss its characteristics, requirements, examples, how to read it, and what are its advantages. For more information, you can read the following article. In addition, you can also read other articles such as Double Bottom Pattern: Characteristics, Requirements, How to Read, and Examples.

What is RSI Hidden Bullish Divergence

Hidden Bullish Divergence occurs when the asset value makes a series of higher lows and at the same time, the indicator makes a series of lower lows. This indicates that the uptrend is still strong and the correction in value is just profit-taking rather than the emergence of a strong sell-off. In this case, traders should try to buy and buy the asset. As for the indicator, you can use the Relative Strength Index (RSI).
 
There is one line on the RSI indicator, which measures the overbought and oversold levels. With the RSI acting as a forward-looking indicator, traders can easily see the divergence in the price action of crypto assets. Divergence patterns can be identified by traders when the upper or lower range of the RSI is separated from the price action. For traders, this implies that they may have a good start to enter the crypto asset market.
  • RSI Hidden Divergence is a very powerful predictor of trend continuation or trend change.
  • There are crazy amounts of divergences happening on all time frames. Find one, wait for price to test it, find your desired re-entry price, confirm with other tools in your technical toolbox and then trade.
  • Bullish RSI Hidden Divergence only occurs in an uptrend and the trend will continue to rise. While Bearish hidden rsi Divergence only occurs in a downtrend and the trend will continue down.
  • For swing trading, there is no need to carry the position for a longer period of time. Usually swing trading should be between 15 to 20 percent and then you can book your profit.
  • Do not risk more than 1% of your capital until you have mastered this strategy.

RSI Hidden Bullish Divergence Pattern Characteristics

To start looking for divergence, you first need to see if the price action has made a higher high or a lower low. It can be helpful to draw a line on your price chart to see if this has happened. For example, in the price chart below, we can see that the price has made a lower low.



Once you’ve connected the two bottoms with a line, you can use your chosen indicator to see if the price action is diverging from your technical analysis tool. The only parts of your technical indicator you really need to focus on here are the tops and bottoms, just like your price chart – so it can be helpful to draw trendlines on your indicator as well.



From the chart above, we can see that the technical indicator – in this case the stochastic oscillator – has not yet reached a lower low. This means that there is a bullish divergence, as the downward momentum is weakening and could soon reverse to the upside. It is important to note that if you end up missing the divergence, and the price has already reversed, you should not rush into a position. In fact, it would be a good idea to look at a longer timeframe and gather data on how the market behaves after the divergence before you enter a position.

Requirements for RSI Hidden Bullish Divergence

Here are some points to recognize bullish divergence patterns on crypto asset charts.
  1. Having a chart with only two variables to contend with is a critical component in spotting divergence. It is possible to detect it using an indicator such as the Relative Strength Index (RSI).

  2. Pay special attention when the RSI shows a trend reversal, such as moving from a downtrend to an uptrend.

  3. Divergences, such as market highs following market tops, should be on your radar once you have identified the correct areas on the chart.

  4. Recognizing different price actions that may cause divergence is important for traders.

RSI Hidden Bullish Divergence Example

Let us understand this swing trading concept with the example shown below using Bullish Hidden RSI Divergence: We should note that in this strategy we are buying on temporary weakness in an ongoing strong uptrend. From the daily chart of Nestle below, we can see that there is a strong uptrend. From point ab, price is continuously making higher lows and RSI has been making lower lows.
 
Here we can see a bullish RSI Hidden Divergence. At point B we can buy this stock by confirming the volume. From point cd again price is making higher lows but Relative Strength Index is making lower lows. Again we can see here a bullish Hidden Divergence. We can see that at point d, there is buying pressure by confirming the volume and we can buy more. With this, we can get confirmation that the uptrend will continue.

BUT BE CAREFUL!

If price is moving up, isn’t that Bullish? Shouldn’t momentum confirm that there is strength on the upside? We can see that momentum is clearly not in line with price action. But we should also note that weakness is also present in this trend as the RSI continues to make lower lows. When trading with a trend, one should be cautious when the trend is about to reverse as there is weakness in momentum.
 
Once the RSI consistently makes lower lows, price will also start making lower lows. The thing to remember when you are swing trading, just swing trade. You don’t have to carry the position for a longer period of time. Typically swing trades should be between 15 to 20 percent and then you can book your profit.



From the graph above we can conclude that:
  • Trend: There is a clear price trend structure, higher highs and higher lows.
  • Time Frame: Daily chart for swing trading.
  • Sign: RSI Hidden Bullish Divergence is just a sign to take a long position.
  • Trigger: Start buying on dips to previous lows. This presents a better Risk-Reward ratio.
  • Stop Loss: Latest lowest price.
  • Risk: Do not risk more than 1% until you have mastered this strategy.

How to Read RSI Hidden Bullish Divergence

Before trading Hidden Divergence, here are some rules to follow:

Rule 1: Look for the “Four Price Scenarios”

For Hidden Divergence to exist, the price trend must form one of the following:
  • Low is higher than previous low
  • Lower high than previous high
  • Double Top
  • Double Bottom
One of these four scenarios must occur in price action before it makes sense to check the indicator signals. The first two scenarios are fairly straightforward and were shown previously in the bearish and bullish Hidden Divergence. Double tops and double bottoms are patterns that form due to the movement of an asset’s value. In short, a double top pattern forms an “M” shape while a double bottom forms a “W.” The peaks and troughs of the price chart do not need to reach the same point for double tops and double bottoms to occur.



Pola double top dan double bottom. (Sumber: BabyPips)

Rule 2: Only Connect Lows for Hidden Bullish Divergence

For bullish divergence, connect the lows in the price action and also the lows on the indicator. As shown in the image below, the lows on the price chart should line up vertically with the lows on the indicator.




For Hidden Bullish Divergence, vertically align a connected higher low on the price chart with a connected lower low on the indicator. (Source: Phemex, TradingView)

Rule 3: Only Connect Highs for Hidden Bearish Divergence

For bearish divergence, connect the highs on the price chart and do the same for the highs on the indicator. As shown in the image below, the highs on the price chart should line up vertically with the highs on the indicator.



For bearish Hidden Divergence, align the lower lows vertically on the price chart with the higher highs connected on the indicator. (Source: TradingView)

Rule 4: The Gradient of the Line Indicates the Strength of the Divergence

As mentioned in Rule 1, divergence can only exist if there is an upward or downward slope in the price trend or in the indicator. The steeper the slope, the higher the probability of a price reversal or the opportunity to profit.

Rule 5: Don't Double Down on Divergences

Trends don’t last forever, and it’s smart to trade divergences as soon as they appear. If a divergence is seen, but price has reversed and is quite far from the recent swing high/low, then be patient. It’s best to wait for the next divergence.

Trading Benefits Using RSI Hidden Bullish Divergence

Here are the advantages of trading using RSI itself. These advantages are:
  • Easy to understand.
  • Every now and then they give good signals that warn of a change in trend strength.
  • Works in any market and time frame.

After learning about RSI bullish divergence, you can learn about other patterns related to this RSI bullish divergence. In addition, you can also register to be able to trade with a minimum capital of 150,000 rupiah!