How to avoid market traps using RSI and MACD
One of the most common mistakes traders make is ignoring divergence signals between price and technical indicators like RSI or MACD. For example, when the stock price rises, but the RSI shows a decline, it may indicate that the market is losing strength and we will soon see a correction. Many traders then buy at the peak, hoping for further increases. For instance, investing 5000 PLN in stocks that seem to be rising can result in a 10% drop, losing 500 PLN. Another mistake is not accounting for slippage and spread, which can increase transaction costs. Buying stocks for 10000 PLN in high volatility conditions, the actual cost may rise by an additional 2%, which is 200 PLN more.
Divergences act as early warnings of a change in market direction. When you ignore these signals, you expose yourself to unforeseen price changes. The mechanism of divergence is that technical indicators, such as RSI and MACD, are based on past data, which allows capturing subtle changes in market dynamics that are not yet visible in the price itself. Ignoring them is like driving a car without looking at the road – eventually, you will crash into something.
Assuming you have a capital of 15000 PLN and consistently ignore divergence signals. You buy at the peak when RSI and MACD show declines. Over the course of a month, you make five such transactions, each for 3000 PLN. With an average value drop of 5% per transaction, you lose about 750 PLN. Additionally, transaction costs amount to another 150 PLN. As a result, you lose 900 PLN, which represents 6% of your capital in just one month.
Here are specific steps you can take:
Analyze the charts for divergence every day before starting trading.
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