Divergence allows to identify trend reversal places, so to sell near the top of a trend or buy near the bottom. Very useful method to confirm validity/proper location of a butterfly pattern.
We can talk about Stochastic, MACD, RSI, Volume Divergences. The concpt is the same, so to start with let's discuss divergence based on the RSI indicator.
If price is making lower lows, but the RSI is making higher lows we are talking about regular bullish divergence.
If price is making higher highs, but the RSI is making lower highs, we have regular bearish divergence.
Watch this VIDEO by Scott Carney where he presents his way to use RSI divergence with harmonic patterns trading -> http://www.harmonictrader.com/htprz.htm
These 2 screenshots are taken from Scott video (link above). Again, I recommend you see this short video nicely explaining the concept (includes more examples).
More examples and hints to follow...
Last edited by kor4x; 10-23-2012 at 04:38 PM.
There is also a method called an RSI BAMM by Scott Carney. Have you seen and used it as an entry and confirmation method?
seems to work OK for me.
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