RSI Stochastic Divergence Strategy

It is generally known that the trend is your friend. Buying pullbacks within an established trend forms the basis for almost any trading following strategy. While there are many different approaches to trend trading, in this trading strategy we make use of the oscillators to find hidden divergences and trade in the direction of the trend. Hidden divergences are usually less frequent than the classic divergences. They are more valid and signal a more powerful trend continuation pattern.

RSI Stochastic Divergence Strategy – Chart Set ups

• EMA’s 20 and 50, Closing prices: The two Exponential moving averages serve as a visual guide to the trend. We look for short positions when the 20 EMA is below 50 EMA and conversely, long positions are taken when the 20 EMA is above the 50 EMA
• Stochastic: (14,3,3 High/Low Exponential): The Stochastic Oscillator will be the main indicator pointing us to hidden bearish and bullish divergences
• RSI (13 or 14, Closing prices with 50-line only): The RSI acts as a trigger indicator for us to go long or short. Long positions are taken when RSI crosses above 50 and short positions are taken when the RSI crosses below 50, following a hidden divergence and trend confirmation from the Stochastic and the EMA’s.

Once the indicators are added to the chart, the set up is as shown on the chart below.

• Bullish Hidden Divergence: Price makes a higher low, Stochastics makes a lower low
• Bearish Hidden Divergence: Price makes a lower high, Stochastics makes a higher low

The illustration below gives a quick snapshot of the two types of hidden divergences. We wait for these appear just before the EMA crossover or only after the first EMA crossover.

Trend divergence trading – Trade Set ups

For long positions

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• EMA 20 is above EMA 50 or has made a bullish crossover
• Stochastics has signaled a hidden bullish divergence
• Buy when RSI 14 crosses above 50-line
• Set stops to recent swing low
• Book first target at the most recent high
• Trail the second target by moving to break-even after the first target is reached

For short positions

• EMA 20 is below EMA 50 or has made a bearish crossover
• Stochastic has signaled a hidden bearish divergence
• Sell when RSI 14 crosses below 50-line
• Set stops at recent swing high
• Book first target at the recent swing low
• Trail the second target by moving to break-even after the first target is reached

Important Notes:

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• A hidden bullish/bearish divergence is to be used only on the first bullish/bearish EMA crossover
• There is a good chance that the second position often gets stopped out, unless where trends are strong in which case, the profit potential can be greatly magnified
• For additional confirmation, look for inside bars or engulfing bars from the candlestick patterns

RSI Stochastic Divergence Strategy – Trade Setup

Short Set up Example

1. 20 EMA crosses below 50 EMA
2. Stochastics shows a hidden bearish divergence
3. RSI crosses below 50-line
4. Additional confirmation: Bearish engulfing near the end of the hidden bearish divergence
5. Short set up reaches the first target, while the second position would have been stopped out

Long Set up Example

1. EMA 20 crosses above 50
2. Stochastics prints a hidden bullish divergence
3. RSI moves above 50-line
4. Long position is taken with stops set to the previous swing low
5. The first target set to the recent swing high is reached
6. Stops for the second position is trailed to break even and the trade is eventually stopped out at the next swing low point shown on chart

RSI Stochastic Divergence Strategy – Powerful Reversal Strategy

One of the biggest advantages of trading the hidden bearish divergence with the trend divergence set up is that trades are often reversed. The stops are usually tighter compared to the targets and when a trend starts to unfold, big profits can be captured. The trend divergence strategy can be used on time frames from H1 and up to D1.

By: forexstrategieswork

3 Bar Net Line Strategy – a Joe Stowell Price Action Strategy

The 3 Bar Net Line Strategy was made famous by Joe Stowell. The 3 Bar Net Line Strategy is a price action strategy to determine the change of trend. No lagging indicators are used in this strategy. And because price action is used as the only means to determine the change of trend, this method can be used alongside existing methods such as moving averages to confirm the trend change and thus allow traders to trade in the direction of the trend.

What is the 3 Bar Net Line Strategy?

Existing trend: Down

Aim: Determining change of trend from ‘Down’ to ‘Up’

1. Find the lowest low in price and mark the high of this bar as #1
2. Compare this high to the most recent higher high and label this bar as #2
3. Using the high of #2 bar, find the most recent highest high and label this bar as #3
4. The high of the #3 bar becomes the three bar net line. When prices close above the high of the #3, it signals a change of trend.

Existing trend: Up

Aim: Determining change of trend from ‘Up’ to ‘Down’

Find the highest high in price and mark the high of this bar as #1
Compare the low of the bar #1 to the recent lower low and mark this as bar #2
Look for the lowest low of bar #2 and label this bar as #3
When prices close below the low of bar #3, it signals a change of trend from Up to down

Notes:

When new highs or lows are formed, repeat the process
Ignore any inside bar that are formed
The above screenshots shows how using Stowell’s 3 Bar Net Line Strategy set up, you can anticipate potential change of trend as they happen.

How to trade the 3 Bar Net Line Strategy

As you can see by now, the trading strategy can be customized in different ways. For example, when trading with divergence, you can make use of the 3 Bar Net Line Strategy to confirm the change of trend and then take positions accordingly.

Another way to trade the three bar net line strategy is to apply moving averages. First, wait for confirmation of a change of trend from the 3 bar net line strategy and then wait for the moving averages to confirm the same and then enter a position.

The chart below illustrates both a buy and a sell signal by combining the 3 Bar Net Line Strategy and the moving averages (20/50 EMA’s).

Notice how the three bar net line first gives us a signal of a potential change of trend on a break of the three bar net line. The change of trend is then confirmed by the moving averages confirming the trend as well.

In both the entries, the set ups were really smooth leaving no subjectivity. Another important factor is that by using the three bar net line, traders can gain more confidence in trading something as simple as moving average crossover.

3 Bar Net Line Strategy – Simple and powerful

The 3 Bar Net Line Strategy is very simple and easy to master. There isn’t much of subjectivity involved when identifying the highs and the lows in prices. It might perhaps take some practice on your part but it’s all gonna be worth it as this will become a lifelong money making skill for you and your family.

By: forexstrategieswork.com