What is spacing? 🤔
Divergence is a concept in technical analysis used to predict trend reversals before they happen. It occurs when there is a divergence between price action and the Relative Strength Index (RSI), indicating that the current trend is weakening and may soon change. 🚨
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Types of spacing
1. Positive Divergence:
• When the price is making lower lows while the RSI is making higher lows.
• Signal: Possibility of trend reversal to upward. 🚀
2. Negative Divergence:
• When the price is making higher highs while the RSI is making lower highs.
• Signal: Possibility of a downward trend reversal. 📉
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How to benefit from distancing 🔍
1. Monitoring peaks and troughs:
• Compare the price action to the RSI movement on the chart.
• Watch for any discrepancy between them to determine the spacing.
2. Confirm the signal: ✅
• Use additional tools such as support and resistance or Japanese candlesticks to confirm the divergence.
3. Determine entry and exit points:
• Use divergence signals to accurately identify entry or exit zones for a trade. 💡
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Practical examples
• Positive distancing:
If the price is falling 📉 and making new lows, while the RSI is rising and making higher lows, this indicates a possible trend reversal to the upside. 🔼
• Negative spacing:
If the price is rising 📈 and making new highs, while the RSI is falling and making lower highs, this indicates a possible downward trend reversal. 🔽
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Tips for trading with divergence 💡
1. Time frame:
• Use longer time frames (4 hours or daily) for more reliable signals. ⏳
2. Integration with other indicators:
• Combine divergence signals with other analysis tools to improve trading decisions. 🛠️
3. Risk Management:
• Have a clear plan to minimize losses and take advantage of expected moves. 🛡️
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The divergence between the RSI indicator and price action is an effective tool for anticipating reversals before they happen, giving you a powerful trading advantage. 🔥
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