Hello everyone,
I want to start by apologizing for not keeping up with the thread questions, however, it appears that you are all answering each other's questions, which is great to see. But, I think the only outstanding question is what settings to use with RSI and how that relates to price and divergence.
I use RSI(7) of the CLOSE, and I look at the full candle including low and high and not just the close of the candle. The "text book" definition of divergence should dictate that we either change our price to look only at the close of the candle to match the RSI setting, or change our RSI to look at high/low or whatever to match the price candle. I, however do not do that, and that is how this system works, RSI is set to close, but i still look at high/low of candles to determine "custom divergence" if you would care to name it that.
Why would I do that instead of the classic divergence?
Because we do not only look at classic divergence to enter the trade. We have a few rules that need to be met before we trigger a trade. Having said that, it makes the rules of entry "unique" and nothing says we have to use anything that is done by the text book. Additionally, which is more important is the fact that one of our rules of engagement is to wait for a pinbar as a candle formation as a signal candle. If you were to think about this one, and check your charts, you will see that there is a considerable percentage of those pinbars that would make a new high/low and then reverse and close on the other side of the pervious peak/trough to where you actually draw the divergence line. If you were to consider where those pinbar candles CLOSE, you will not get the classic text book divergence, as in the candle close did not make a higher close/lower close while the actual high of the candle made higher high or lower low. Please see the chart below where the magenta line shows "custom divergence" and the yellow line shows no divergence if you were to look at the candle close. I hope this makes sense, but if not, feel free to ask more questions.
I want to start by apologizing for not keeping up with the thread questions, however, it appears that you are all answering each other's questions, which is great to see. But, I think the only outstanding question is what settings to use with RSI and how that relates to price and divergence.
I use RSI(7) of the CLOSE, and I look at the full candle including low and high and not just the close of the candle. The "text book" definition of divergence should dictate that we either change our price to look only at the close of the candle to match the RSI setting, or change our RSI to look at high/low or whatever to match the price candle. I, however do not do that, and that is how this system works, RSI is set to close, but i still look at high/low of candles to determine "custom divergence" if you would care to name it that.
Why would I do that instead of the classic divergence?
Because we do not only look at classic divergence to enter the trade. We have a few rules that need to be met before we trigger a trade. Having said that, it makes the rules of entry "unique" and nothing says we have to use anything that is done by the text book. Additionally, which is more important is the fact that one of our rules of engagement is to wait for a pinbar as a candle formation as a signal candle. If you were to think about this one, and check your charts, you will see that there is a considerable percentage of those pinbars that would make a new high/low and then reverse and close on the other side of the pervious peak/trough to where you actually draw the divergence line. If you were to consider where those pinbar candles CLOSE, you will not get the classic text book divergence, as in the candle close did not make a higher close/lower close while the actual high of the candle made higher high or lower low. Please see the chart below where the magenta line shows "custom divergence" and the yellow line shows no divergence if you were to look at the candle close. I hope this makes sense, but if not, feel free to ask more questions.
Attached Image (click to enlarge)
(see the chart before)
