Hi,

I'm not so good in this.
Appreciate the help.

Is this a divergence ?



If so,

Where would you enter?
Where would you take profit / stop out / cut loss?

Thanks.

Let me try:

Q1: Is this divergence?
A1: Yes.

Q2: Entry/Stop/Target?
A2: My short was at the break of up trend line, and cover when it bounce back up. Yes, it is a losing trade. I may do a second short at A, breaking of up trend line again. The target I am looking at is the width of the channel measured from the red up trend line down. But I think this time round the target is not met and price started to bounce back. Most likely I would have a trailing stop along the stretch colour yellow to protect my profit even before target is met. And in this second case, I would be out at a profit.

Just my 2 cents.

For the 1st short,
the market collapsed but recovered by the end of the day.
Did the trader take profit ?
If he did not,
would he hope that tomorrow would be better ?

If the trader held the (still in the money) position,
how would he react when the market open against him the next day?

Asian markets rallied strongly on the nervous day,
but taiwan did not.
Did the trader cut loss or
did he win at the end of the day?

--- --- ---
Then he shorted again,
it was good.
Too good,
did he take his money ?
(perhaps he wanted the money as he lost the 1st round)

He did not,
and he was really happy on the HAPPY day.
but again did he take profit ?

On the 3rd day,
it was really a sick day,
the trader had to make a decision fast,
did he make a rational decision ?
--- --- ---
I have to ask again,
what is the exit strategy?
What is your experience using trailing stops,
Or do you have a profit target,
like the one HC suggested ?

Is the divergence still valid ?

will you sell the pullback ?
will you sell when the market reopen ?
Is it worth noting that while the taiwanese are celebrating chinese new year,
the bulls are having their parties at other markets ?

I did not look at the bar chart when I post my first reply. Now having seen the chart instead of line chart, I wish to add the following:

1. When doing first "Short", If I have time to monitor price real time, most likely I will get out on the same day, after seeing price reverse in intraday chart. The trade will likely to be a break even trade.

2. If I keep the position, and the next day ("nervous" bar) market opens on a gap up, I will get out first, at a loss. I don't think I have the can hold till market close.

3. When I "short again", after riding "happy", then gap up "sick" bar would trigger my trailing stop. This time round, it would likely to be a small profitable trade, or a break even trade depending on where is the exact exit.

4. As for the question of "is the divergence still valid?" My take is that the divergence is the background setup for my first "short", while price breaking the up trend line is the trigger for entry. Thereafter, there is no more divergence, except that RSI is trending lower, confirming trend weakness.

Thanks HC.

I guess spotting the divergence is not difficult.
But trading is always challenging.

Perhaps the answer lies not in the tools,
but within oneself.

Hi Undead,

After repeating for twice watching your provided Daily chart of MSCI Taiwan, I have bit bit to comment:

-- the 1st short (right at the 1st SHORT day) should not have come in place, given that a daily chart is used. Actual action should be performed on the following trading day instead
-- but instead, a big gap-up is observed and I dun think an entry will be made on the NERVOUS day, instead it will be yet another "waiting" day to observe how the mkt react by the end of the day. Indeed, Index closes below uptrend again and one would have consider taking a position over the next trading day again, right?
-- and once again, the Index create another gap-up which there is no chance to place a short. Yet another "waiting" day
-- the real action I supposed would be the next trading day after SHORT AGAIN day as the Index did not gap above uptrend line again. I put this as the 1st short position.
-- although Friday's big gap-up really make the position "nervous", at the end of the day, Index did not managed to close-up the gap-down on the SHORT AGAIN day.

1st of all, I'm not sure how the gain/loss is calculated. The short position is likely at a level between 314.5~315 while the stop-loss is either upper/lower of the gap-down. As the SICK day has erased the profit and turned into a loss, I would have covered this 1st short position within the intra day.

Will there be a 2nd short position? I would go for it if the Index gap-down on Monday.

Above is only theoritical, even if this is a stock instead of an Index, will I really do it in accordance to my analysis? I don't know until I really do it...

RDgs..

Hi Lion,

Thanks.

I think it is not a problem to short on the "Break" day.
Since the trendline can be extrapolated.
That is I know where the trendline will be on the next day,
even if I do not monitor the market realtime.

Of course, we can chose to wait for "comfirmation" and short Break+1
or Break+2.

Sometimes it will work,
perhaps it might not.

For example on the "Nervous" day, the market opened up,
but broke the trendline and closed below.
Some traders would say its a bearish signal.

There are more entry methods for a simple RSI divergence.

How about exits?

Perhaps this is why I commented that RSI divergence might not be difficult to spot,
but trading is always difficult.

I hate to trade with "realtime charts"
but I am curious :D



Time is 9.05AM

On hindsight,
we can use candlesticks to time the entries.



What's the difficulties ?
I'm not sure, I did not trade it.

And how about the exits,
we have not seriously discuss them yet.

So easy to spot,
but how would you trade it ?

I started this thread because I had noticed many many dangerous divergences,
before the big downward movement in many markets.

1 month later, on the charts we can see that the RSI divergence really works.

But because we had walked together till the crash,
we know it was really tough trading.

Trading always and really difficult.

Tushar Chande and David Kroll had shown that RSI can be restated as

RSI = 50 * (Momentum + |Momentum|) / |Momentum|

where Momentum = Close - Previous Close.

I will not go through the algebra again, but through an example, show you that the formula is correct.



Using the Wilder's formula

RSI = 100 * 550 / (550 + 340 )
= 61.8

and using the restated formula

RSI = 50 * (210 + 890) / 890
= 61.8

This is not a exciting nor surprising discovery,

But understanding what is momentum then,
will explain why a divergence between
RSI and price is important.

Then,
we will understand RSI is something that make sense.
It is not simply a chart pattern,
where price will reverse after if there's a divergence.
It is simply restating of the law of motion.

In physics, we will define it as mass * velocity.
And by observing nature,
we can understand that the momentum can slow down,
but the object can still be moving (for example up)

Unfortunately for the technical analyst,
the analyst can observe the divergence, ie the slowing of momentum,
the analyst cannot put a formula to it.

Meaning
it is not possible to say,
when the price is going to reverse.

Many users of the RSI,
will use the RSI as an overbought/oversold indicator.

While Wilder did not explicitly encourage it to be used in this manner,
I believe he had designed it to be so.
However why is it so difficult to use the RSI as a overbought/oversold indicator?

I really appreciate any help.

Thanks

Just share something learnt from the battle field.

1a. From the way RSI is computed, it cannot exceed 100.

1b. So when in a steady trending situation, even though RSI is already showing high value, further strength in underlying security will give little increase in RSI readings; while a slight dip will not drive the RSI reading down much, keeping RSI still at high value, meaning overbought. Overbought, there suppose to be a correction coming, but the fact that the security keep edging up after a slight dip will shake us out way too early. So OB/OS is not a good way to use RSI to trade.

2. Next we have to question what value of RSI is OB & OS? If we refer to the attached STI chart, the traditional 30/70 will not give any good trading signal. Nor 20/80.

3a. To overcome the problem mentioned in 1b, then the OB/OS level has to go asymmetrical. So asymmetrical that it made OB/OS concept fall off.

3b. For example, if we look at STI chart during late 2006, to made RSI give good OB/OS trading signals, RSI will become OB when exceeded 75, and OS when fall below 56.

4. From 3b, it become obvious that it is not so easy to define what are the OB/OS levels when price is in progress. I rather look at its value and direction, or when trend is in place, tone down reliance on RSI but look at MAs.

Hi HC,

Thks for sharing.

---
Some examples
I was expecting a bigger move from the swing low of 17420,
perhaps to break 17525.

But it's not coming.

The RSI divergence and the break of the trend-line
suggested a change of trend.



I wasn't sure though.
But I figure at 17480 ,
the risk reward is 1:1 (17515 , 17445).

So I just went ahead and got lucky.

I consider this to be a weakness of RSI when trading stocks.

If you think there's a very high possibility that we may see a correction,
but if you also think that this particular stock, for example, going to be $10,
then why should you be concerned about the divergence ?

I call this cheating

Divergence - OK
Break swing low - OK
Break support trend line - OK
Resistance trend line intact - OK



and I thought it would be easy money.

But no,
tw just refused to fall like the rest of the markets.

If you haven't noticed,
Nikkei opened 17635 , trading 17480 at its low
Simsci opened 418.8, trading 416.3 off its low

Taiwan up 1.5%

---

The RSI is stucked at 0, but that's by design.
I'm not sure how to solve this problem,
therefore I do not trade overbought/oversold signal.

---

Trading is never easy B)

Another interesting example from Nikkei.



Fibo Target, support trend line, bullish divergence RSI @ 17470.

:ph43r:

Even if it's a selling day,
there's always up and down

---
Update
The support offer temporary relief,
The 17470 not able to hold.
It went up to 17510,
but still far off from any successful profit targets! :lol:

Another RSI example

More RSI examples

Markets will not follow the script.

Bought at X, cut at Y, bought back at Z.



Then for this, even better,
at !!!, a stop was triggered.
Mind you, Osaka had stopped for lunch.
Why they were selling with so much conviction and had to do it during kelong hours, I have no idea.



No prize for guessing where I cut.
But if I don't cut, then even if I make money, that's not part of the plan.
And I had no idea the markets are going to stage a mini bull run

I think it should be clear that RSI divergence is a very good concept but trading it is not so easy.