RSI and Divergence:
- When there is a divergence between price and RSI, trader can get signal that trend reversal is imminent.
- Positive and negative divergences are observed between price and RSI at different stages of bull and bear phases.
- One can stop such divergences, and take an early entry and make a good percentage gain in short term.
- There is some risk involved in this, because after a divergence is formed, the trend reversal could take some time, so one must have patience. Sometimes whipsaws can also occur.
Positive Divergence between Price and RSI:
- Price keep dragging downwards, while RSI takes support near bottom and forms higher bottom higher tops.
- Prices can either decline, or fail to rise, while RSI starts inching upwards, which forms a positive divergence.
- Once such formation is seen, one can say that trend reversal is imminent.
- Once such positive divergence is formed, it can take some time, before the prices also starts moving upwards, as per the nature of divergences.
- So once such divergence is spotted, one can initiate a buy.
Negative Divergence between Price and RSI:
- Prices keep inching upwards or stabilize in upward range, while RSI fails to make new highs, and starts dragging downwards.
- This indicates the imminent trend reversal; prices also eventually follow RSI and starts moving downwards.
- Once such negative divergence is observed, one can initiate a short or sell the position and exit the market.
- Once such negative divergence forms, it can take some time before prices actually starts declining.
- Once such negative divergence is spotted, one must never make a mistake of buying. Stay away from such stocks.
RSI in Monthly and Weekly Time Frame:
- When RSI is above 50 in weekly charts, overall uptrend remains intact.
- Same way in monthly charts, When RSI is above 50, up trend remains intact.
- In one side up trend RSI remains above 70 in monthly charts.
- In weekly charts, RSI oscillates between 50 and 100.
- When RSI is above 70 in weekly and monthly charts, when it crosses 70 upwards in daily charts, strong upward momentum is witness.
- In monthly and weekly if RSI is up, but in daily charts when RSI declines, and makes a bottom, it gives the chance to buy.
- Same way when in monthly and weekly RSI is down but in daily charts RSI tops out, it gives the chance to sell.
Price Rate of Change (ROC):
- ROC measures that how fast the price is rising relative to the past price rise. 12 Days ROC is popularity time frame used in this indicator.
- ROC tends to oscillate below and above its base line. i.e “0” line.
- In different time horizons, and in different stocks it tends to take support and face resistance at particular levels.
- One has to spot such levels and initiate positions accordingly.
- The indicator is designed for use in ranging markets- to detect trend weakness and likely reversal points. However, when combined with a trend indicator, it can used in trending markets.
- Rate of Change trading signals are identical to momentum signals.
First of all, one must have to set overbought and oversold points based on reflection of previous ranging markets. The points should cut across at least 2/3 of the peaks and troughs.
When to Buy?
- Go long when rate of change crosses to below the oversold level and then rises back above it.
- Go long on bullish divergences- where the first holder is below the oversold level.
When to Sell?
- Go short when Rate of Change crosses to above the overbought level and then falls back below it.
- Go short on a bearish divergence – with the first peak above the overbought level.
Stochastic Oscillator is a momentum indicator which uses support and resistance levels.
- The stochastic oscillator is displayed as 2 lines.
- The main line is “%k”, the second line is called “ %D” (dotted line) is a moving average of “%k”.
- The “% k” line is usually displayed as solid line and the “%D” line is usually a displayed as a dotted line.
- This indicator oscillators between 0 and 100.
- Important levels to lookout are 20 and 80
3, 14 Days setting is popularly used in “%K and %D.
When to Buy?
- When % K line crosses above %D line, buy signal is established.
- Buy when the oscillator falls below specific level and then rises above that level.
When to Sell?
- When %K line crosses below % D line, sell signal is established.
- Sell when the oscillator increases above the particular level and then decreases below that level.