Prashanth
10th May 2009, 02:03 PM
Trading: Divergence
Looking at your charts, it may be unclear whether you look for divergence along the price peaks or valleys. Here’s a system that works.
If the price trend is down, use the bottoms to look for divergence
If the price trend is up, use the tops to look for divergence.
If price is moving horizontally (a trading range), then don’t look for divergence, especially if the indicator is between 30 and 70!
Here are the rules for trading on bullish divergence.
Avoid divergences that occur in the RSI neutral zone (between 30 and 70).
Price will follow the indicator, but the move may or may not be significant.
If price is moving down, then look for divergence along the price and indicator lows not the highs.
Look for a straight-line run down
The indicator should bottom near or below 30.
If bullish divergence occurs, that’s the buy signal.
If volume is trending higher or spikes higher, that helps confirm the buy signal.
If the indicator makes a new low, then close out the trade (failed bullish divergence signal).
Here are the bearish divergence trading rules. They are similar to the bullish divergence rules.
Avoid divergences that occur in the RSI neutral zone (between 30 and 70).
Price will follow the indicator, but the move may or may not be significant.
If price is moving up, then look for divergence along the price and indicator peaks not the valleys.
Look for a straight-line run up to show upward momentum.
The indicator should top out near or above 70.
If bearish divergence occurs, that’s the sell signal.
If volume is trending higher or spikes higher, that helps confirm the sell signal.
Confirm with a trend following indicator that the trend has indeed changed.
If the RSI indicator makes a new high, then close out the trade (failed bearish divergence signal).
-- Thomas Bulkowski
Looking at your charts, it may be unclear whether you look for divergence along the price peaks or valleys. Here’s a system that works.
If the price trend is down, use the bottoms to look for divergence
If the price trend is up, use the tops to look for divergence.
If price is moving horizontally (a trading range), then don’t look for divergence, especially if the indicator is between 30 and 70!
Here are the rules for trading on bullish divergence.
Avoid divergences that occur in the RSI neutral zone (between 30 and 70).
Price will follow the indicator, but the move may or may not be significant.
If price is moving down, then look for divergence along the price and indicator lows not the highs.
Look for a straight-line run down
The indicator should bottom near or below 30.
If bullish divergence occurs, that’s the buy signal.
If volume is trending higher or spikes higher, that helps confirm the buy signal.
If the indicator makes a new low, then close out the trade (failed bullish divergence signal).
Here are the bearish divergence trading rules. They are similar to the bullish divergence rules.
Avoid divergences that occur in the RSI neutral zone (between 30 and 70).
Price will follow the indicator, but the move may or may not be significant.
If price is moving up, then look for divergence along the price and indicator peaks not the valleys.
Look for a straight-line run up to show upward momentum.
The indicator should top out near or above 70.
If bearish divergence occurs, that’s the sell signal.
If volume is trending higher or spikes higher, that helps confirm the sell signal.
Confirm with a trend following indicator that the trend has indeed changed.
If the RSI indicator makes a new high, then close out the trade (failed bearish divergence signal).
-- Thomas Bulkowski