Saturday, May 28, 2011

Tops and bottoms, Failure Swings, divergence

Tops and bottoms, Failure Swings, divergence
Traders watch for double tops or what Wilder referred to as "failure swings." If the RSI makes a double top formation, with the first peak above 70%, and the second peak below the first, you get a sell signal when the RSI falls below the dip. In contrast, the double bottom at or below 30% (with the first low below 30% and second place at the same level or above) gives you a buy signal when the RSI breaks above the previous peak.
These failure swings can lead to differences between RSI and price action. For example, divergence occurs when the market makes a new high or low, but fails to set the appearance of a new RSI high or low. A waiver may be an indication of an impending reversal. According Wilder, differences are the most important signal provided by RSI.

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