Using RSI divergence like a pro

Readers who have been following my weekly outlook for a while, know that I often talk about RSI divergence. It is one of the tools in my trading toolbox. But what exactly is a divergence and how do you correctly identify it? How do you use the RSI indicator in reversal trading and how does it help you spot reversal setups?

Divergence

 

 

I get a lot of questions about the details of how to use the RSI indicator in general and RSI divergence in specific, so let’s go over everything you need to know in order to use RSI divergences like a pro.

 

What is RSI?

 

Now, to understand RSI divergences, the first step is to know what the RSI indicator actually measures. Most of you will have seen it on your trading platform, but do you really understand what it does? Let’s have a look.

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Deliberate Practice

Deliberate Practice in Trading

 

You just need more chart time“.

 

I hear this advice all the time. My take on this? Yes and no.

 

Yes in the sense that as a beginning trader, you do need to develop a feel for the market you’re trading. Without any time in front of the charts, you will never understand the natural rhythm of a market, patterns, the influence economic news has on the price, how support and resistance are used, etc. In other words: chart time is a way to develop a gut feeling about how the market operates.

 

No in the sense that beyond the experience developed by initially observing charts, staring at charts without a purpose won’t increase your knowledge level and more importantly, won’t necessarily improve your bottom line.

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Cut losses short and let winners run

The Art of Cutting Losses & Letting Winners Run

For years, I was losing money because I didn’t get it. Not really. You hear it everywhere, it’s probably the best-known trader’s mantra in the world:

 

Cut Your Losers Fast And Let Your Winners Run

 

Often, people just skim over this line as something that’s probably true, without any second thought. We know what it means, but we don’t act on it. And we do this all the time in our lives: a smoker will occasionally think: “I should stop smoking”. Many people have this thought in their mind: “I should start exercising”. I should contact my friend whom I haven’t spoken in months. I should go on that world trip I’ve been planning for years.

 

I should cut my losses faster and let my winners run.

 

I really should

 

I should.

 

Yet, most of us don’t.

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