Every experienced Forex trader should know the four Relative Strength Index (RSI) trends in a currency cycle. The four cycles are: the positive and negative phases of divergence and reversal. These 4 RSI cycles have a direct correlation with determining the trend of a currency.
In the Positive divergence cycle, the price of the currency moves upwards and is considered to be bullish. This upwards movement helps the currency gain momentum. With momentum comes an increase in volume helping the currency price to keep climbing. As you identify this upward trend, you should enter the trade by purchasing the currency and keeping it until it hits its peak. Once the currency hits the peak of uptrend, a negative reversal starts to develop.
A negative reversal starts when the positive divergence loses momentum. Even if the price continues to increase, you will see a slow-down of momentum and a decrease in volume. When both momentum and volume decrease, that is signal that a negative reversal is developing. The negative reversal starts once the price stops moving upwards and starts to fall. At this point the price hit the highest and you should close your open trades to pocket your profits. Of course, at this point you will see this cycle turn into a negative divergence.
A negative divergence happens when the sentiment of the market turns from bullish to bearish and the price goes on a downfall or down trend. Many traders like to try to make profit in both movements by selling or shorting the currency here. However, a more advisable strategy is to sit and wait until the price hits rock bottom and a positive reversal starts to develop.
A positive reversal may be the most profitable position in your chart. At this point, the currency price hit rock bottom and it is starting a reversal and moving upwards again. Once you identify a positive reversal, you should buy the currency again. This cycle points the cheapest price of a currency and, in the long run, will yield you the most profits by following these simple steps.
As you can see, divergence and reversal cycles are an integral part of a currency behavior. By mastering the 4 RSI cycles, you could make great profits. Every trader should have a “go to” strategy when everything else seems to fail. This simple strategy may be that “go to” strategy and should be integrated to your trading toolbox.