AleksanderThor

RSI - a misunderstanding in the public

FX:US30   Index of top 30 shares on Wall Street
119 6 10
From the books: "RSI - the complete guide by John Hayden" and "RSI. Logic Signals & Time Frame Correlation" by Walter Baeyens

Price/RSI divergence provides another source of confusion. Many mainstream publications about the RSI tell you that this kind of divergence signals the end of the current trend. Some even list divergence as buy and sell signals! Divergence occurs frequently and it does not have any special significance. The RSI divergence is just a part of its mathematical constraint, which is why Constance Brown made her own indicator with no upper and lower limitation

I realize that the published trading literature states that a bullish divergence is an indication that prices are about to rally. The implication is that a bullish divergence is an indication that an uptrend is about to commence. As you are now realizing, a bullish divergence only appears when the existing trend is down. If the trend is clearly down, why are we even thinking of buying? Wouldn't it be more prudent to be looking for a place to get short?

A bullish divergence signifies that the existing trend is down and the Bears are exhausted. We should be expecting a rally to sell into. If we have short positions, then we should exit some or all of the shorts, but not reverse to become long! Prices should rally or reverse to some degree before falling to new lows.

Inversely, when we see a bearish divergence, the trend is up and we should probably expect a retracement to lower prices because the Bulls are exhausted. It is time that we should begin looking for a reason to buy.
A simple divergence means that prices have encountered enough resistance that they need time to consolidate their previous move. Once this has occurred.prices will resume their downward or upward march.

For these reasons I see bearish divergences as a chance to get long when the trend line in the RSI is broken and vice versa with a bullish divergence. Mostly I pay attention to "Hidden" or DD- DD+ signals which are seen in corrective waves
plok
7 months ago
Interesting, thanks for your post. I agree with you, your way of using the RSI also works better for me than the classic way of looking for longs at bullish divergence and vice versa. I am familar with Constance Brown's work (she calls your DD- and DD+ signals Negative and Positive Reversals)

I'm a bit puzzled by your first indicator, I see the ranges (80/40 and 60/20) which define up- and downtrends, but the values on the right don't seem to match. The indicator ranges between 23 and -13. Would you care to elaborate a bit?

The second indicator on your chart, is that by any chance Brown's Composite Index?
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AleksanderThor PRO plok
7 months ago
Hey Plok! The top indicator is a RSI histogram since I used back in the days to daytrade using Woodies CCI - Ghost Trading. Therefore I tried to plot the RSI as a histogram to get a clearer picture of the internal swings. Yep the second indicator is Constance Browns. Yea the DD+ and DD- got many names (hidden, Negative/postive Reversals, MMs and DDs) :) I'm currently reading her book for the Trading Professionals. I'm also working on RSI projection targets from all time frames and having Monthly as the dominant! :D
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plok AleksanderThor
7 months ago
That clarifies things. Thanks!
Great book, the best I've come across so far. I've read it a couple of times but keep discovering new things and insights. On the other hand, the level and complexity of it can be a bit intimidating for me as a novice. Me and chapter 2 aren't exactly best friends... :)
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AleksanderThor PRO plok
7 months ago
Haha just started! :) I have been through her Fib and Wave books, which were some of the better TA-books. If you still novice I would recommend the works of Jim Kane. He also got his own approach to fibs and geometry. He's a great introduction to pitchforks as well. And 4xforecaster on this page got some great "Pearls"
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plok AleksanderThor
7 months ago
Good luck, after chewing through chapter 2 it gets much better (for me at least).
Thanks for the recommendation, I will check out his Jim Kane's works. I did find 4xforecaster on this website previously, definitelty appreciate his way of working and his explanatory skills.
+1 Reply
Chartistry PRO
7 months ago
Excellent work.
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