I am very new to share trading and am currently reading about charting and the use of Histograms and divergence indicators. I am struggling to grasp how they work. Can anyone offer a simple explanation in laymans terms? Any feed back would be greatly appreciated.
Histograms & Divergence indicators - How do they work?
- Thread starter jay1541
- Start date
Divergence and the Stochast
The market is not a good place to be in at the present moment, it is best left to the experienced traders!!!
This is a good time to experiment with new setups
One simple setup that has a 'reasonable" success rate is trading divergence - so what do we use?
Personally I use the RSI(9) and the Stochastic (5,3,3) and price chart
The RSI has a good saw tooth type trace which helps highlight hi and lo pivots, and is similar to a price line diagram - but more pronounced (and it shows divergence)
The Stoch is a lagging momentum indicator and we make use of this to find stocks showing divergence
All you need to do is scan for stocks giving a stochastic buy signal then look at the associated RSI chart
For Bullish divergence:
If you can draw an upsloping trendline thro the last two RSI pivot lows ((below the RSI 40 level - (down trend)), the steeper the better, then you have bullish divergence. This is not strictly true as sometimes you can draw an upsloping trendline without having divergence - but this is not a problem as the following trade management still applies.
Once you have your upsloping trendline in place - consider staying with the trade until it is breached.
However if you do not want to give back too much profit then you may consider the following.
Trendlines often contain trends within trends, i.e short term and medium term trends.
If after our entry , the RSI forms a higher pivot low, we can redraw our trendline thro the higher pivot low and our original lowest pivot low, this will give us a steeper trendline (more dollars per unit of time)
There may come a time when our last pivot low cannot be connected to the original pivot low without passing thro the RSI trace - in this case the correct trendline is that which connects the last pivot low to the farthest away pivot low without passing thro the RSI trace
Thats it easy. Trendlines are a whole subject on their own (worth while studying them!!)
If for some reason you miss getting taken out on a break of a trendline - the RSI can also be used for Dow Theory i.e. as long as you have a series of higher highs and higher lows - you have an uptrend
The RSI values which I have used are those which I have on my default screen which I use for all my strategies.
I've become lazy in my old age and now rely solely on indicators to do the work for me - I have 5 or 6 on my default screen - each one used for a specific purpose.
THEY WORK just as well as any other form of analysis, they are not perfect
Its risk money management and discipline that ultimately decide if you are a winner or loser - the rest is just a personal thingy- amuzement - but it can serve a useful purpose, it gives us the confidence to take a trade
IF YOU ARE NOT IN IT - YOU CAN'T WIN IT
Have a nice day
Peter
The market is not a good place to be in at the present moment, it is best left to the experienced traders!!!
This is a good time to experiment with new setups
One simple setup that has a 'reasonable" success rate is trading divergence - so what do we use?
Personally I use the RSI(9) and the Stochastic (5,3,3) and price chart
The RSI has a good saw tooth type trace which helps highlight hi and lo pivots, and is similar to a price line diagram - but more pronounced (and it shows divergence)
The Stoch is a lagging momentum indicator and we make use of this to find stocks showing divergence
All you need to do is scan for stocks giving a stochastic buy signal then look at the associated RSI chart
For Bullish divergence:
If you can draw an upsloping trendline thro the last two RSI pivot lows ((below the RSI 40 level - (down trend)), the steeper the better, then you have bullish divergence. This is not strictly true as sometimes you can draw an upsloping trendline without having divergence - but this is not a problem as the following trade management still applies.
Once you have your upsloping trendline in place - consider staying with the trade until it is breached.
However if you do not want to give back too much profit then you may consider the following.
Trendlines often contain trends within trends, i.e short term and medium term trends.
If after our entry , the RSI forms a higher pivot low, we can redraw our trendline thro the higher pivot low and our original lowest pivot low, this will give us a steeper trendline (more dollars per unit of time)
There may come a time when our last pivot low cannot be connected to the original pivot low without passing thro the RSI trace - in this case the correct trendline is that which connects the last pivot low to the farthest away pivot low without passing thro the RSI trace
Thats it easy. Trendlines are a whole subject on their own (worth while studying them!!)
If for some reason you miss getting taken out on a break of a trendline - the RSI can also be used for Dow Theory i.e. as long as you have a series of higher highs and higher lows - you have an uptrend
The RSI values which I have used are those which I have on my default screen which I use for all my strategies.
I've become lazy in my old age and now rely solely on indicators to do the work for me - I have 5 or 6 on my default screen - each one used for a specific purpose.
THEY WORK just as well as any other form of analysis, they are not perfect
Its risk money management and discipline that ultimately decide if you are a winner or loser - the rest is just a personal thingy- amuzement - but it can serve a useful purpose, it gives us the confidence to take a trade
IF YOU ARE NOT IN IT - YOU CAN'T WIN IT
Have a nice day
Peter
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