RSI 5 & Divergences,
The way I have been applying the use of divergences to Nocona system is this: I don't take a signal (long at >26 short <74) unless I see a divergence in the RSI: for instance price making a new low while RSI is making higher lows (+divergence) and viceversa when going short. If the RSI divergence is confirmed by the Stoch and MACD diverging it is a very good sign.
I exit longs at 70 and short at 30. But some time I will stay in longer, I rely on Winfree Support and Resistance sheet.
The idea behind waiting for a divergence is to avoid getting in a trade when the price is breaking out of a tide range. In those circumstances the RSI can stay above 74 (or below 26) for days and the price keeps going up till it triggers the 2% stop loss. Since Jan 06 we had 5 stop losses, at this rate the system will register more stop losses for 06 then it did in 05. I don't know, at this stage, that waiting for the div. will make the system more profitable, but it makes for a easier overall experience because I am won't be sitting on big draw downs and I will incur smaller losses when losses occur. I will probably also miss some good trades because often no divergence will show up.
As I mentioned I receive Winfree support & resistance sheet and I like to enter and exit trade when they are in the support or resistance area, but the RSI is my main signal.
Divergences can provide forewarning of important market turns. When the indicator (RSI/Stoch/MACD) diverges from the price trend, it can provide a signal that a trending market may slow or reverse. A positive, or bullish, divergence occurs when the price is making new lows while the RSI or Stcoh or MACD fail to reach new lows. A negative, or bearish, divergence occurs when the price is making new highs while the indicators mentioned above fail to reach new highs. Both of these divergences are most significant when they occur at relatively high/low levels.
The best to you,
Lygio
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