SL = 141.768
TP = 138.422
TradingView.com Moderator, Alias: 4xForecaster
Predictive Analysis & Market Forecasting
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The interim has been really good so far, on the basis of added negative divergence with RSI, which indicates a dedicated bearish strength. While price has remained within structural ranges, there has not been any compelling reason to move any of the stop-losses.
Overall, initial predictive analysis and forecast, as well as trade profile remains unchanged.
PS: Do the due (diligence) and don't trade like I do: Plan your own trade, and trade your own plan. Always!
1 - BULLISH divergences are associated with a BEARISH trend continuation in price
2 - BEARISH divergences are associated with a BULLISH trend continuation in price
This is a rule established long ago by the author of RSI himself, Mr. Welles Wilder. The reason why 99.99% of traders continue to use bullish/bearish divergence (especially the few instances where it works) is because they have been inculcated by the institutional traders, who know better.
Instead, the retail trader should look for RARER instances where RSI carves a higher high while price makes a lower high (so, here look at the top of RSI and top of price, and RSI should have a rising line against a declining line in price, which would define a NEGATIVE (not bearish) Divergence.
Conversely, when RSI carves a lower low, while price prints higher lows, then look underneath the RSI and price, to see that indeed RSI defines a declining line against a rising line underneath price. In which case, you will be dealing with a BEARISH DIVERGENCE.
I have been a student of the RSI since 1997 when I started to trade. I used RSI the way everyone was taught, and only when I discovered these original rules was I able to profit from the market.
Here is an exercise I gave all of my students:
1 - Keep the bearish divergence in mind and see how often it appears in a rising trend. Draw ALL of the bearish divergences, but do not be dismayed at the fact that price keeps on rising.
2 - Keep the bullish divergence in mind, and see how often it appears in a declining trend. Draw ALL of the bullish divergences, but do not be dismayed at the fact that price keeps on falling.
I say "do not be dismayed", because the contradiction of such a core-held belief that bullish/bearish divergences are associated with reversal will often make the junior trader blind to these very frequent divergences.
The reason that divergences of this nature (i.e.: bullish/bearish) occur is that they represent pauses in the trend, but once a number of them occur, a price decompensation eventually occurs, and the institutional traders are quick to point this out as the "sign" for a reversal. So, YES, eventually after so many BEARISH divergences, a RISING price will fail and FALL, as much as after so many BULLISH divergences, a FALLING price will eventually RISE, but it has NOTHING to do with the assumed predictive nature of these divergences.
Now, in contrast, take on the other exercise:
1 - Look for the POSITIVE divergence, where a decline in RSI support is associated with a rise in price support, such that RSI would stand supported on a DECLINING line against price standing on a RISING support. See that its occurrence is much rarer. While not 100% associated with a price action that ends up rising, it most often is.
2 - Look for the NEGATIVE divergence, where a rise in RSI overhead resistance line is associated with a fall in price resistance line, such that RSI would "hit its head" against a RISING line versus price "hitting its head" against a falling line. Here too: see that its occurrence is much rarer. While not 100% associated with a price action that ends up rising, it most often is.
The analogy I teach has to do with the "Hammer" and "Shovel" analogy. If you look at it from a mechanical (moving object) standpoint, you will soon notice that:
1 - A NEGATIVE RSI sees a rise of RSI hammering over price, such that price ends up moving down like a hammered nail
2 - A POSITIVE RSI sees a decline in RSI shoveling price up, such that price ends up moving up as if shoveled by cantilever.
If the analogy does not work (I have a mechanical mind), then stick to drawing the lines:
1 - When RSI carves lower lows, see if price is supported by a rising support = POSITIVE Divergence
2 - When RSI carves higher highs, see if price is kept under a falling resistance = NEGATIVE Divergence
This lesson is worth thousands (I kid you not) and is still being taught by the only Welles Wilder student I know (I found the instruction though other sources), but it pretty much is just this simple. Here is whom teaches these lessons:
What I have done over the years was to discover other subtleties about the RSI, which has allowed me to define my own predictive analysis and forecasting, being able to define trend, reversal and targets WITHOUT using price at all. Weird, but true.
I hope this little lesson helps a lot.
(feel free to pass around - expect a lot of objection from many "experienced" traders too)