RELATIVE STRENGTH INDEX PART - 2

RELATIVE STRENGTH INDEX

        TECHNICAL ANALYSIS 

Technical analysis is a belief that is believed by many people to be true. It is not science which can be used to earn money in stock market. In other words the tool used by us for technical analysis may not show same result as it has shown in past. If we invest money as per technical indicators then we should keep in mind that it does not guarantee 100% profit or return of profit. Understanding technical analysis helps us to keep ourselves in better position to know how market is behaving.

Disclaimer 

If you take action based on my input or technical analysis as explained by me then you shall be responsible for your actions.  

RELATIVE STRENGTH INDEX PART 2

RELATIVE STRENGTH INDEX PART 1

RELATIVE  STRENGTH INDEX DIVERGENCE

WHAT IS DIVERGENCE ?

Divergence is when the prices of shares are moving in the opposite direction of a technical indicator. Divergence warns that the current price trend may change the directions .

FINDING DIVERGENCE WITH RSI 

A bullish divergence occurs when the RSI creates an oversold reading followed by a higher low that matches correspondingly lower lows in the price. This indicates rising bullish momentum, and a break above oversold territory could be used to trigger a new long position.

A bearish divergence occurs when the RSI creates an overbought reading followed by a lower high that matches corresponding higher highs on the price.

Lets see above bullish swing rejection

1. RSI falls below oversold territory (red line) see just before oct 23.
2. It crosses back oversold category.
3. RSI falls without crossing oversold line.
4. RSI crosses most recent high.

Bullish divergence shows that market or share pricing going to change in bullish divergence it is going to increase.

WE can also take long position in bullish divergence.

Now comes Bearish Divergence.

Lets see above bullish swing rejection

1. RSI falls below overbought territory (green line) 
2. It crosses back overbought category.
3. RSI rises without crossing overbought line.
4. RSI crosses most recent low.

Bearish divergence shows that market or share pricing going to change in bearish divergence it is going to increase.

WE can also take short  position in bearish divergence. If we take positions based on RSI position it would give profit of 300.

MY VIEW POINT ON USING DIVERGENCE

We should use divergence as a tool of additional check before using other technical indicators.

IF divergence is taking place that means that price trend is going to change and we should be precautious while using other technical indicators. If divergence is overlooked it may turns to be loss.

The limits of 30 & 70 are generally used in analysing RSI.

BUT we can use other limits to generate more signals for example 50 & 70 when it is dealing above 50.

We would learn about other technical indicators in later post.