RSI Divergence Trade

Entry Logic

• Exact Entry Trigger: Enter long on bullish divergence where price makes a lower low but RSI makes a higher low (RSI below 30). Enter short on bearish divergence where price makes a higher high but RSI makes a lower high (RSI above 70).
• Confirmation: Entry requires a confirmation candle closing in the direction of the trade.
• Timeframe: 5-minute, 15-minute.
• Location: Near a key support or resistance level.
• Market Condition: Ranging or end of a trend.

Exit Logic

• Profit Targets: First target at 1.5R. Second target at the next significant price structure level.
• Scaling Out: Scale out 50% at the first target.
• Trailing Stop: Trail the stop loss behind the prior swing low/high.
• Signal Failure: Exit if price makes a new extreme without RSI confirming the divergence.
• Opposite Signal: Exit on a confirmed divergence in the opposite direction.
• Time Expiration: Exit if the trade is not profitable within 8 candles.
• Momentum Loss: Exit if momentum stalls after entry.

Stop Loss Structure

• Hard Stop: Place stop 1 ATR below the entry low for longs, or 1 ATR above the entry high for shorts.
• Structural Stop: Place stop beyond the price extreme that created the divergence.

Risk Management Framework

• Risk Per Trade: 0.5% of account capital.
• Daily Limit: 3 losing trades.
• R:R Requirement: Minimum 1.5:1.

Position Sizing Model

• Sizing Approach: Fixed fractional.
• Volatility Adjustment: Reduce size if ATR is 50% above its 20-period average.

Trade Filtering

• Market Conditions to Avoid: Strong trending markets.
• Time Restrictions: Avoid trading during major news events.

Context Framework

• Trend Direction: Trade in alignment with the higher timeframe trend.
• VWAP Relationship: Longs are stronger above VWAP, shorts are stronger below VWAP.

Trade Management Rules

• Breakeven: Move stop to breakeven after price moves 1R in profit.

Time Rules

• Optimal Window: First two hours of the trading session.

Setup Classification

• A+ Setup: Divergence at a major weekly support/resistance level with volume confirmation.
• A Setup: Divergence at a daily support/resistance level.
• B Setup: Divergence on an intraday chart without higher timeframe confirmation.

Market Selection Criteria

• Instruments: Liquid stocks and ETFs.
• Volume: Minimum 1 million shares traded daily.

Statistical Edge Metrics

• Win Rate: 45-55%.
• Profit Factor: 1.6.
• Expectancy: 0.3R.

Failure Conditions

• Strategy Fails: In strongly trending markets where momentum overrides divergence signals.

Psychological Rules

• Discipline: Avoid chasing entries if the initial move is missed.

Advanced Components

• MTF Alignment: Only take trades that align with the weekly and daily trend direction.

Location

• Strongest: At the test of a major support or resistance level.
• Weakest: In the middle of a trading range.