Double Bluff

Here is a classic example of price setting up for a breakout:



A long position can be taken if price breaks just above the blue line, with a stop placed just below the red line.

In an earlier post I described a converging breakout. This looks for convergence with RSI and MACD indicators. So here is the same setup with the indicators added:



I've included the standard representation of the MACD, but I really only focus on the blue curve, and remove the histogram and red signal line to reduce clutter. To trade the breakout I want to see convergence of the indicators. In this instance the indicators are weakening (particularly the MACD), indicating that the breakout may fail, so I don't take this type of breakout.

Here is what happened:



Price moves high enough to trigger the trade and get you excited, then retraces downward taking out the stop loss position.

Then to rub salt into the injury, it moves off in the direction you anticipated and probably reaches your target!



This is a pattern of behaviour I see quite often. That green bar that spiked down to knock out the stop loss position - I think it's possible to trade it. So it's a project I'm working on to define the setup rules and then back-test.

Oh, finally, I did take the trade, using another setup that worked. I'll talk about it later in the week.