Trading Hidden RSI Divergences with EMA and Stochastic Confirmation

Summary

This article describes an automated divergence strategy using RSI, a 200-period EMA, and the Stochastic Oscillator. The EMA filters direction: the strategy seeks buys above it and sells below it. RSI and corresponding price swings identify hidden bullish or bearish divergence, while the Stochastic provides a later confirmation. For a buy, the specified pattern is a lower RSI low paired with a higher price low; for a sell, a higher RSI high pairs with a lower price high. The example waits for an oversold or overbought threshold recross within a stated bar limit before allowing entry.

The EA places trades only when there is no open position and the bar has changed. It sets stops at recent swing points, derives targets from a risk-reward ratio, and calculates position size from the risk amount and stop distance. The article is an implementation tutorial and educational example, not evidence that the rules are profitable. The supplied text gives no performance results, out-of-sample tests, or robustness analysis, and its divergence and swing definitions may require careful interpretation.

Key ideas

• The EMA provides a trend filter for the divergence setup.
• Hidden bullish divergence pairs a lower RSI low with a higher price low.
• Hidden bearish divergence pairs a higher RSI high with a lower price high.
• Stochastic threshold recrosses confirm signals within a limited bar window.
• Stops use recent swing points, while targets and lot size reflect risk and stop distance.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.