4xForecaster

RSI Is Your Friend - What Non-Price Analysis Can Tell You #Forex

FX:AUDJPY   Australian Dollar/Japanese Yen
Friends,

Let me just start by making this statement, which has caused more reaction than I have ever cared, but it simply is true:

1 - RSI's bearish divergences do NOT foretell an impending decline in price. Instead, they are associated with sustained rise in price.
Conversely:
2 - RSI's bullish divergences do NOT foretell an impending rise in price. Instead, they are associated with a sustained decline in price.

Yes, I know. You have been told, taught and even paid for statements that come in direct contradiction to this, but let me tell you right now: Put your gun down, Google             Positive Divergence in RSI (not Bullish Divergence) for instance, and you would be more apt to find a RSI signal associated with a consistent premonition in terms of signal than any of that bearish/bullish divergence.

I have given multiple lessons to private individuals or public audiences demonstrating that before any reversal, there are multiple bearish/bullish divergences, and that the reversal only comes true after a sustained numbers of the said divergences.

In contrast, a Positive/Negative Divergence in RSI only comes in a great while, and is typically associated with a deeper retracement, if not a reversal.

I continue to be dismayed that even professional traders keep on pointing at bearish/bullish divergences. I have to explain here that the trader is NOT completely wrong to point these out, but remember that these divergences are associated with a contrarian trend (i.e.: bullish with decline and bearish with rising prices for the most part).

As a predictive analyst/forecaster, and having worked, decorticated and peeled RSI studies for many years (I started in 1997, the year I entered medical school), I soon learned that RSI is and continues to be erroneously taught.

Another feature of my trading is that I do NOT trade off of price. As many of you might have heard from me: "Price is the dangling carrot at the end of the stick held by institutional hands". The institutional traders know every stop-losses, every positions and can decide to move a M5, M15, H1 or even a H4 chart against a widely held position of retail traders, wide the screen clean of these SLs and yet not impart much changes at the daily/weekly levels at which they trade for their liquid providers/banking clients. So, keep that in mind as well.

So, best is to use certain indicators. I use the RSI-14 set at HLC/3. Here is an old method I used to decide on entries:

Take a look at the bottom of the chart. See a trend? Do you also realize that all the lines are perfect parralels to one another (there are one steep and one soft-sloped). See how they keep on failing while price remains (recently) in a downward trend?

Now, of late, RSI is approaching its upper steep-TL boundary. Do you see the association with the price's own TL?

My point here is to use an indicator in the most discreet and alternative way. After so many years of doing research on RSi (lots of backtesting in several RSI values, and across many TF and markets), RSI can definitely be one of your best trading buddy.

By the way, the author of RSI himself has a few residual students who are now teaching. These students are teaching the first rule I mentioned above, so this is not something I made up, but something that comes right from the RSI author himself - Question is: Why do institutional trading firms continue to erroneously teach RSI and offer you to open an account there? Is this a misleading attempt, or simply a developing case of the blind leading the clueless?

Cheers,

David Alcindor
Predictive Analysis & Forecasting
David Alcindor, CMT Affiliate #227974
Alias: 4xForecaster (Twitter, LinkedIn, StockTwits)

Signal Service or Private Course - Contact: admin@KADAInstitute.com
All updates on https://twitter.com/4xForecaster
05 JUN 2014 - Reference to Positive/Negative Divergences In RSI:

Here are a few things I was able to Google on these true RSI event - You will soon see (it takes a little longer if you have been inculcated to the wrong method) that there is a stark difference in RSI's ability to foretell for sure whether a reversal is underday using the Positive/Negative Divergences (and not the deleterious "bullish" or "bearish" methodologies, which amount to a sad outcome).

1 - What is Positive/Negative Divergence | Cobra's Market View:
http://www.cobrasmarketview.com/what-is-positivenegative-divergence/
---> This one explains it just as I teach it. Very simple and straight forward.

2 - Negative And Positive Divergence Can Forecast Price Targets
http://www.stock-charts-made-easy.com/positive-divergence.html
---> This one goes a step further and helps you approximate a target. Not what I use in my predictive/forecasting model, but still quite elegant.

3 - Beware of site that use "positive" or "negative" when they mean "bullish" or "bearish", and still demonstrate the wrong way of trading these discreet geometric phenomena, as in this site:
http://www.investopedia.com/ask/answers/05/052905.asp
---> Yes, this in NOT a negative divergence, but a bearish divergence, and I count three successive bearish divergences (i.e.: the number of times price posted a higher and higher price against a declining RSI) before it fell. This is in stark contrast with a negative divergence - which does not occur in the chart, partly because the indicator is ROC. But again, this still qualifies for a misrepresentation of a divergence in name.


If you have any question on the subject, i will do my best to answer in a timely manner. If there is no answer, i'm either busy charting another chart for you on some other occult subject, or I'm busy doing other things. As my wife says:

"Life happens when you are making plans".

Cheers,

David Alcindor
+3 Reply
Pinkfloyd111. 4xForecaster
2 years ago
thank you for all explanations
+2 Reply
4xForecaster PRO 4xForecaster
2 years ago
All I can say is that I have traded for far many more years using the most-widely taught way of trading RSI, and I never was able to consistently - worse, confidently - call a reversal.

The only good outcome to all this was that I dedicated my market research on defining trends, improve my predictive guesses, better define support/resistance levels, and strive to call tops.

While it is true that one cannot be 100% right all of the time, I can also tell you that the model I have discovered - and whose results I freely share on this site without revealing its method - has provided remarkable results. These results were time-posted on a private Facebook group at first, then shared with the wide public under 4xQuad.com (a Facebook page address). They are also compiled here:

Dead-On Hits http://bit.ly/16JMnH8

Cheers,

David Alcindor
+2 Reply
All I can say is thank you!! I never looked at it that way
+1 Reply
Afterstar
2 years ago
Thank you for sharing! The more we know the better! :)
+1 Reply
Sam0101
2 years ago
hhi forecaster, thanks for this. For the moment being, theres no clear indication or going upwards or vice versa?
+1 Reply
4xForecaster PRO Sam0101
2 years ago
@GohSam - As indicated in the explanation, the directional bias (indication) is provided by the filtering of RSI. At the moment, RSI is following a cookie-cutter pattern that suggests an imminent decline.

The correlation action in price is found in its proximity of an overhead resistance line which has proven to push price down whenever RSI printed that same pattern over and over.

Therefore, expect price to submit itself to the repetitive patterns found in RSI, rather than expecting RSI to pattern itself according to price.

So, yes, there is a very clear indication of an imminent decline IF the correlation between price and RSI remains intact - Without this correlation, I would otherwise not be able to answer any directional inquiries.

Hope this makes it clearer for you.

Cheers,

David Alcindor
Reply
Sam0101 4xForecaster
2 years ago
Hi David, thanks for this clear explanation n ultimately the analysis. It was so much useful n helpful
+1 Reply
Timing is key 4xForecaster
2 years ago
Hello 4xForecaster,

For the record, I don't use RSI for a few reasons one being a lagging indicator, however you are correct when stating that the RSI will form patterns within RSI that repeat, as a trader you next job is to correlate these repetitive patterns with whats happening in price as it interacts with proven resistance lines and levels. When both line up consistently you have a workable tool. In regards to institutional trading firms, the reality is, they know, historically and with certainty where everyone puts their stops, heck, they even teach you where to put them so they can consistently take them?

Sincerely,

TIK
+1 Reply
4xForecaster PRO Timing is key
2 years ago
Hello @Timing is key - Agreed. It seems that the lessons teach the green traders how to line up their necks in the hole and pull on the handle on their own until the guillotine calls for the next sucker. It's a pavlovian cycle one can only get out by looking at the market with a different set of eyes, mind's eyes that is - David
+1 Reply
Timing is key 4xForecaster
2 years ago
I love your analogy:) Just learn something their NOT teaching and you'll be fine!
Reply
Asterix
2 years ago
Hi Dave, I tried to use RSI the way you teach on another chart - does it mean the price will go up soon on this one?

https://www.tradingview.com/e/Wta97AyZ/
+1 Reply
4xForecaster PRO Asterix
2 years ago
@Asterix,

There are a lot of lines in your charts, so I am not sure what you are pointing to. However, if you look at the most recent RSI, where it forms a lower low whereas price posts a higher high, then you effectively have a POSITIVE divergence.

Here is what I just posted on Twitter:

"$BTCUSD: Example of POSITIVE RSI divergence which is more reliable than the "bullish" divergence -
snapshot
via @tradingview "

snapshot


I hope this makes sense to you and others.

Cheers,


David Alcindor
Reply
4xForecaster PRO 4xForecaster
2 years ago
Here is what the insert says:

"In this example, it shows how the POSITIVE divergence is formed: RSI makes a lower low against a higher high in price, giving the impression of RSI LIFTING price UP, as in a shovel motion.

The opposite is true with NEGATIVE divergence, where RSI forms a higher high against a lower low in price, giving the impression of RSI HAMMERING price DOWN, as in a hammer motion.

Hence the SHOVEL & HAMMER analogy I used with my students

- David Alcindor"

David
Reply
dojitrader 4xForecaster
2 years ago
Are you showing what the rest of the RSI world calls
"hidden" or as I call it "inverse divergence where price action
expends more energy to move a shorter distance thus is
expressing a type of exhaustion before reversal ?
Thanks for your thoughts !!!! {{{On everything}}}
+1 Reply
4xForecaster PRO dojitrader
2 years ago
I am not familiar with that terminology. Several traders (typically former students of either Mr. Welles Wilder, or of his subsequent teacher, Andrew Cardwell) have come up with different names.

Most widely distributed name is that from John Hayden who wrote a concise book called "RSI: The Complete Guide" among other so-called authoritative books on the subject. Mr. Hayden call this phenomenon a "MDRP"

MDRP stands for Momentum Discrepancy Reversal Point.

Some others call it a positive/negative divergence, or some other distinguishing designation. What Mr. Hayden did was to make it sound a whole lot more complex that what it should be called. In my prior lessons, I have made the distinction solely on the positive vs. bullish, or negative vs. bearish. Otherwise, non of the concept changes at all.

I contacted both Mrs. Welles Wilder and Andrew Cardwell in the past.

First, Cardwell verified that John Hayden, author of the RSI book, "plagiarized" his course, having taken notes and transcribed them into that red little book. Mr. Cardwell course is found on www.CardwellRSIEdge.com - You will see that the lessons are very expensive, but I am still curious about these, since I conducted my own research on RSI and came across interesting findings. I once tried to share these with Mr. Cardwell when I referred to John Hayden's book, however, all I ever heard from him was his plagiarism accusation towards Mr. Hayden.

On my own, I have taught RSI in my own ways, revealing only a few of the features I had discovered, but this little "tool" is really more than an indicator. Some erroneously refer to it as a price-lagging indicator, when in fact, I use it as an integral part of my predictive analysis and forecasting among other things, proving that this is a forward-looking tool which can determine with great precision where price will move to in terms of direction, where it will stall in terms of consolidation, and where it will turn in terms of reversal.

Second, as an aside anecdote, Mr. Welles Wilder, original author of the RSI indicator (among other indicators) left the field of technical analysis shortly after his RSI publication in a trading magazine to turn to inter-planetary motions as a method to predict the stock market. Quite weird, but he got such a large international following crowd that is still going on today. I paid my membership too, thinking that I could get close and talk to him. Instead, I was only able to call his organization (www.DeltaSociety.com), but an older gentleman informed me that Mr. Wilder has stepped out of technical analysis and was not available to discuss any of his former works on RSI.

Reply
4xForecaster PRO 4xForecaster
2 years ago
@dojitrader - I hope that above explanation helps answer your question - David
Reply
Asterix 4xForecaster
2 years ago
Thanks, Dave. This terminology is still a bit over my head, what I wanted to show with the chart is that based on RSI patterns, seems that RSI would soon jump up again, which was correlating with price going up. Your chart is much cleaner, though :)

Is it correct to think that RSI that goes down while price rises signals that buyers are not exhausted yet?
+1 Reply
4xForecaster PRO Asterix
2 years ago
@Asterix - "Is it correct to think that RSI that goes down while price rises signals that buyers are not exhausted yet? "

Asterix, it depends what the chart shows.

First of all, there is a distinction to be made regarding RSI's positive/negative divergences in terms of span of time. If this particular divergence occurs within 4-8 candles, then the move is extremely strong in the intended direction.

Second, I am not sure I fully grasp your question without a chart. I am a 100% visual trader and learner, so a chart with your question would help tremendously. In any case, a BEARISH (not negative) divergence is associated with a RISING. The bearish feature indicates a TEMPORARY respite in price, as if each move across the chart required a bit of breathing in while rising, then breathing out with falling a little bit - BUT, note that these divergences will cause SHALLOW reversal that DO NOT fall below the prior low in MOST cases.

The concept of exhaustion occurs whenever these bearish/bullish divergences occur over such a long and recurrent period of time that it eventually cause a price exhaustion. This is this instance that institutional traders will show you as an indelible proof that bearish/bullish divergences have a validity.

A validity should require a RARE occurrence associated with a positive INTENDED outcome, which is what you will see with the rarer, and much more valuable positive/negative divergences.

Is this helping clear things up a bit?

David
Reply
Asterix 4xForecaster
2 years ago
Hi Dave, I was referring to the chart you posted in response to me

snapshot


BTW, do you still think bitcoin is going to correct now with targets below $600?
+1 Reply
4xForecaster PRO Asterix
2 years ago
@Asterix - Exhaustion cannot be determined as far as how many bearish/bullish divergences it will take to chip at the price action and make it turn finally.

The chart I have posted only refers to the other types of divergences. The recent positive divergence calls for a rallying to new heights. An interim reversal can still occur, even though both strength and direction favor a rising price at this point.

David
Reply
Asterix 4xForecaster
2 years ago
Sorry, I am still confused even in terms of basic terminology :(. Your chart seems to give opposite definition of positive divergence
snapshot

than this link you posted
http://www.cobrasmarketview.com/what-is-positivenegative-divergence/
oscillator in this link is in the upper half of the chart, right?
+1 Reply
4xForecaster PRO Asterix
2 years ago
@Asterix - I verified, and it's what it means. The problem I often encounter is that the trader who is used to the bearish/bullish concept has to look at it from a different placement of RSI relative to price. It helps to keep RSI on the same side of the price field as what you are used to. Then, it also helps to use the Hammer & Shovel analogy that I use.

In the hammer analogy (Negative Divergence), RSI rises and falls, thus hammering price down, causing a decline in price

In contrast, in the shovel analogy, RSI scoops down and lifts, thus shoveling price up, causing a rise in price.

This is the best analogy I can come up with, although I wish I could use some animation to reveal really how simple it is, once you turn your brain around, which might be difficult at first - I had a hard time, so I took a piece of paper and rehearse using an imaginary price with RSI underneath it.

David
Reply
4xForecaster PRO 4xForecaster
2 years ago
@Asterix - I will try to come up with several examples if I can find the time this weekend - David
Reply
nikokoev 4xForecaster
2 years ago
Sorri David. But you say lower low for RSI and higher hidh for the prisce, but on chart you show price posts hidher low. I ask that because in my chart I draw lines like you, but very offen I see explanations with lower low and higher hidh.

Cheers!
+1 Reply
4xForecaster PRO nikokoev
2 years ago
Hello @nikokoev - Words may be more complicated than a picture. In any case, the chart I posted with the green lines underneath price and RSI illustrate an example of positive divergence. So, indeed, RSI will show a lower low against a higher high in price. Best exercise to understand these discreet, but important concept, is to draw the lines in all and every chart you see. At the end, it will jump at you quite intuitively.

Also, the analogy that has worked best for me is that of the hammer and the shovel. In a shovel, RSI points down and rotates up, pushing price higher, which is what you'd see in a positive divergence. If you look at the chart, the RSI is pointing down as in a digging shovel, and then its move upward thrusts price to higher highs - Again, take a close look at the price, and you might perhaps start seeing this illustration as well.

In the hammer analogy, the contrary works well as well, where RSI first points to a higher high, then falls, whereas price moves to a lower low, and falls even lower at the point where RSI falls like a hammer, driving the price down like a nail.

I hope the analogy is not too simple, but it has really help be best, as it seems to be much simpler than using "higher high" or "lower low" while having to conceptualize the chart.

Let me know if you have any other question that I need to clarify on this.

Thank you.

David
Reply
4xForecaster PRO 4xForecaster
2 years ago
Here is the chart - Much easier to keep it down here as well, as opposed to having to scroll up and down:

snapshot


David
Reply
nikokoev 4xForecaster
2 years ago
Thank you David!
The analogy is not so simple but is very good, different view of picture.
Thank`s again!
+1 Reply
Sam0101
2 years ago
hi david, is the downside still apply? it seems reluctant to go down any further.
+1 Reply
4xForecaster PRO Sam0101
2 years ago
@GohSam - Yes, this is the very nature of a consolidating market: It builds a direction and a strength by eating the flesh of young impatient traders, then it goes on a digestive walk on its own time - David
Reply
dojitrader
2 years ago
When you get a moment - in no rush ~~~~
If I understand what you're saying, this has finally given a sell signal ?
#1 At the first arrow: a break of the trend line ?
#2 At the retest of the trend line ?
#3 So far it is a failed signal ?
Thanks for your thoughts !!!!
snapshot
+1 Reply
4xForecaster PRO dojitrader
2 years ago
Hello @dojitrader - The point of the commentary was to note the pattern of S/R lines in RSI that do not transpire in price activity, and that these patterns can be assume to foretell a directional change in price, when price is not yet clearly showing any direction.

snapshot


In the last instance, price may have crossed above its own overhead trendline, but RSI has continued its patterned move. So, it may or may not be a signal of anything. However, it is highlighted here to emphasize again RSI's ability to filter price action and direction at times when price seems directionless or unclear.

In this particular instance, price had moved lower, then retraced back up but failed to post a higher high just as RSI has completed its patterned move.

Therefore, there is a possibility that the recent move in price remains bearish, not simply based on the failure of price to rally to higher highs, but precisely based on RSI's rhythmic pattern of resistance and support failures.

So, the outlook, based on this RSI, remains bearish.

Is this somewhat answering your question?

David
Reply
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