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Greetings,
Saw the posts on RSI Divergence and have decided to weigh into the fray as RSI
is one of favorite indicators.
As a "stand alone" indicator, RSI Divergence is rather unreliable. How many
times have we seen price continue to go on its merry way in one direction,
even as the RSI
becomes more and more divergent in the process. This happens often enough to
tell us that RSI is not a very good picker of tops and bottoms. Nonetheless,
if we look at nearly ALL tops and bottoms, RSI Divergence is almost always
present!
How then do we reconcile this paradox? I often employ OTHER indicators to
confirm
an RSI Divergence. Here's how it works:
1.) Has momentum begun petering out on the move?
2.) Is the move OLD? Count your bars. If you are into the 10+ range of bars in
the present move, this is telling you a turn may happen sooner rather than
later.
3.) How far away from the moving average are you? The further the better. The
moving average will often act like a magnet to price.
4.) Has a "letter" pattern formed? Look for "M" tops and "W" bottoms. These
are great signals when RSI Divergence is kicking in.
5.) Never, EVER, take the 1st RSI Divergence signal. This is often a trap! I
might miss a move now and then, but guess what, the market will still be there
tommorow.
Sorry for being so simplistic in my analysis, but in regards to trading, I am
very
simple minded. Hope this helps.
Good trading,
Peter
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