The RSI hidden divergence continuation play is a technical analysis technique that can help traders identify potential continuation patterns in an existing trend. It combines the Relative Strength Index (RSI) indicator with the concept of divergence to spot opportunities where the price is likely to continue moving in its current direction. Unlike regular divergence which signals potential reversals, hidden divergence suggests trend continuation.

Overview

Hidden divergence occurs when the price makes a higher low in a downtrend (or a lower high in an uptrend), but the RSI makes a lower low (or a higher high). This discrepancy suggests that the momentum is actually building behind the current trend, even though the price action might appear weak on the surface. Traders interpret this as a signal that the existing trend is likely to resume after a brief pause or pullback. The "continuation play" aspect highlights the expectation that the trend will continue.

When It Helps

This technique is most useful in established trends. Trying to apply it in choppy or range-bound markets can lead to false signals and whipsaws. It’s especially helpful when the price is consolidating or pulling back within a larger trend, and you're looking for confirmation that the trend is likely to resume. It can be used on various timeframes, from intraday charts to daily or weekly charts, depending on your trading style.

How To Try

Most charting platforms, like TradingView, include the RSI indicator. Here's a basic outline:

• Add the RSI indicator to your chart.

• Identify an existing uptrend or downtrend.

• Look for instances where the price makes a higher low in a downtrend or a lower high in an uptrend.

• Simultaneously, check if the RSI is making a lower low in a downtrend or a higher high in an uptrend.

• If these conditions are met, consider it a potential hidden divergence setup for a continuation play.

Key Settings

The standard RSI setting is a period of 14. Some traders experiment with shorter or longer periods to suit their trading style or the specific market they are analyzing. However, it's crucial to backtest any changes to ensure they improve the indicator's performance. The overbought and oversold levels are typically set at 70 and 30, respectively, but these can also be adjusted based on market conditions and personal preferences.

Tips & Risks

Hidden divergence, like any technical indicator, is not foolproof. It's essential to:

• Use it in conjunction with other forms of analysis, such as price action or trendlines.

• Manage your risk by setting appropriate stop-loss orders.

• Be disciplined and avoid chasing trades based on FOMO (Fear Of Missing Out).

• Recognize that false signals can occur, and be prepared to adjust your strategy accordingly.

• Consistency in applying the rules and settings is key to evaluating its effectiveness.

Quick Checklist

• Confirm existing trend before looking for hidden divergence.

• Ensure price and RSI are diverging in the hidden manner.

• Use other indicators/analysis for confirmation.

• Set stop-loss orders to manage risk.

• Be disciplined and avoid emotional trading.