RSI 101: Scalping Strategy with RSI DivergenceFX:XAUUSD
I'm an intraday trader, so I use the H1 timeframe to identify the main trend and the M5 timeframe for entry confirmation.
How to Determine the Trend
To determine the trend on a specific timeframe, I rely on one or more of the following factors:
1. Market Structure
We can determine the trend by analyzing price structure:
Uptrend: Identified when the market consistently forms higher highs and higher lows. This means price reaches new highs in successive cycles.
Downtrend: Identified when the market consistently forms lower highs and lower lows. Price gradually declines over time.
2. Moving Average
I typically use the EMA200 as the moving average to determine the trend. If price stays above the EMA200 and the EMA200 is sloping upwards, it's considered an uptrend. Conversely, if price is below the EMA200 and it’s sloping downwards, it signals a downtrend.
3. RSI
I'm almost use RSI in my trading system. RSI can also indicate the phase of the market:
If RSI in the 40–80 range, it's considered an uptrend.
If RSI in 20 -60 range, it's considered a downtrend.
In addition, the WMA45 of the RSI gives us additional trend confirmation:
Uptrend: WMA45 slopes upward or remains above the 50 level.
Downtrend: WMA45 slopes downward or stays below the 50 level.
Trading Strategy
With this RSI divergence trading strategy, we first identify the trend on the H1 timeframe:
Here, we can see that the H1 timeframe shows clear signs of a new uptrend:
Price is above the EMA200.
RSI is above 50.
WMA45 of RSI is sloping upward.
To confirm entries, move to the M5 timeframe and look for bullish RSI divergence, which aligns with the higher timeframe (H1) trend.
RSI Divergence, in case you're unfamiliar, happens when:
Price forms a higher high while RSI forms a lower high, or
Price forms a lower low while RSI forms a higher low.
RSI divergence is more reliable when the higher timeframe trend remains intact (as per the methods above), indicating that it’s only a pullback in the bigger trend, and we’re expecting the smaller timeframe to reverse back in line with the main trend.
Stop-loss:
Set your stop-loss 20–30 pips beyond the M5 swing high/low.
Or if H1 ends its uptrend and reverses.
Take-profit:
At a minimum 1R (risk:reward).
Or when M5 ends its trend.
You can take partial profits to optimize your gains:
Take partial profit at 1R.
Another part when M5 ends its trend.
The final part when H1 ends its trend.
My trading system is entirely based on RSI, feel free to follow me for technical analysis and discussions using RSI.
