Outcome for Breakout with Divergence

Last week I posted a setup for a breakout trade. However, I noted that there was divergence between the price action and momentum, which is a warning that the trade could fail. Did price hit the target? Yes, the choice for target price (solid green line)worked well, but price pulled back higher before making the move.



Below is a close-up of the breakout region. Notice that the breakout level (solid blue line) is penetrated, which would have triggered entry into the trade, followed by a exit at the stop loss level (solid red line). The challenge with trading is to perform flawless execution. It's not sufficient to enter place a trade in the right direction and anticipate the correct target price.

Head & Shoulders

Ok I know I said I would give the outcome of the yesterdays trade setups, but I think that will have to wait until tomorrow now. However, here is an interesting chart. It's the daily price of US dollar versus the Yen. A classic head and shoulders reversal pattern has formed. A break of the neckline would suggest that the medium term target will be down the the level marked on the chart.

Breakout Setup With Divergence

Here is a setup for a breakout short on GBPCHF. Price moving down through the blue line would trigger an entry short, with the stop-loss level marked in red, and the target price marked by the solid green horizontal line (at a level coincident with the 200-period moving average and just above the support level at 1.7100.



The setup was identified at about 10pm but as time went by, it became evident that the RSI was failing to converge with price. I look for a horizontal level on RSI as well as price, but it was creeping upwards. The lack of convergence is only slight, and doesn't show up on the 1 hour chart. The price break may be sufficient to correct the lack of convergence. It doesn't show up too well on the image above, but is clearer when the horizontal scale is squashed up abit more. In the chart below I've compressed the time range and you can clearly see that the RSI is rising even though price is on a flat level.



So based on this, I decided not to take the trade, but thought it would be interesting to document the outcome. I'll take a look at it in the morning and post the result.

Live Divergence Trade

Well, I haven't been writing much in this blog recently, so as penance I thought I would log a trade that is a live setup at the moment. EURUSD has formed a divergence pattern. Price has made new highs, but they are not matched by new highs on the RSI indicator.



As I am writing this my entry point (short) has just been triggered. The setup is based on fibonacci retracement levels. My entry was at the 23.6% level (1.3643) with a target exit price at the 123.6% extension level (1.3532).



Tomorrow I'll give an update on how this trade performed.

Must Be Non-Farm Payroll Day ... !