Monday, 14 May 2018

Technical details about RSI and Divergence, Positive Divergence & Negative Divergence between Price and RSI, ROC and Stochastic Oscillator

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.

Trading Signals:

  • Rate of Change trading signals are identical to momentum signals.
Ranging Markets:

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:

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

Time Frame:

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.

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