There was an error in this gadget

Mood!

Wednesday, February 17, 2010

Divergences

When looking at charts one of the indicators I like to look at is RSI.  On it's own it can be difficult to read, a high reading can stay high in an "overbought" situation, especially in a strongly trending up market, and vice versa in a down trend.  However if looking at the evolution of PRICE with RSI, many times (NOT ALWAYS) it can be an early warning sign of a top  or bottom.

Looking at the AUDUSD 8hr chart below :


basically in an up trending market the price makes a swing high, retraces, the rallies again to a new high, BUT the RSI fails to make a new high, NEGATIVE DIVERGENCEThat is the warning signal, and when price turns down a short trade is possible with a stop above the high.

In a down trend the reverse happens, price makes a new low but RSI fails to make a lower low, POSITIVE DIVERGENCE.

This is just another tool to be used in trying to identify good entry points.   I have hand drawn what the next move MAY be in AUDUSD, if it transpires will be initiating a short.

No comments:

Post a Comment

Total Pageviews