The difference between divergences and reversals - RSI

[Soes Bandit]

Hi guys,

I'm wondering if someone could help me? It's a noob question so I apologise in advance.

I do not fully understand the difference between the above. For example, with a bearish divergence and a positive reversal, both the RSI is declining and price is rising. The only difference is the price action that occurs after (bearish divergence price falls... positive reversal price rises). How do you know which it's going to be?

I believe that typically bearish divergences are going to occur in a bull market?

Thanks

 

[Pat Riley]

Soes, what is the RSI based upon?

 

[Soes Bandit]

Soes, what is the RSI based upon?

Hi Pat,

Thanks for the reply.. I appricate it.

I'm sorry, I'm not sure I understand your question? I'm just talking about using a 14 period RSI for any chart in general.

Hope that makes sense!

 

[Pat Riley]

Hi Pat,

Thanks for the reply.. I appricate it.

I'm sorry, I'm not sure I understand your question? I'm just talking about using a 14 period RSI for any chart in general.

Hope that makes sense!

How is the RSI calculated?

 

[Soes Bandit]

How is the RSI calculated?

I thought RSI was only calculated one way?

RSI = 100 - 100 ÷ 1 + RS

RS = Average Gain / Average Loss

 

[Pat Riley]

I was goin ta go off on one about indicators, but it's none of me business. So to answer your question, you know if it's a positive reversal or a bearish divergence because of what the price is doing. I think you're assuming you get a heads up (via RSI?) before the price makes its move. Ya don't. The price has ta be already movin relative to your oscillator of choice for you to notice a divergence/reversal. Are ya aware of the difference between regular and hidden divergence?

 

[Soes Bandit]

Hi Pat,

Sorry, when I say postive reversal I do not mean that i am simply looking for oversold signals. From what I have read, postive and negative reversals are the same as hidden divergences (just a different name). I was confused about the price action leading up to them, I.e with a bearish divergence and a positive reversal, both the RSI is declining and price is rising. I found the following article that helped clear it up though.

http://www.babypips.com/school/high-school/trading-divergences/divergence-cheat-sheet.html

Cheers