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.

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.

Trade of the Day

Below is a 4H chart for EURUSD.



Usually I wait for price to breakout of the ranges indicated by the green and red levels. In particular, for EURUSD I would wait for a break short through the red level. However, The innediate price action was bullish, and this was supported by divergence on the chart. So I decided to take the bounce from the support level and look for opportunities to go long. Short time frame tick charts gave me the chance for a pullback as shown below:



Entry worked perfectly at the 61.8% retracement level giving me an entry price of 1.3187 with a stop of 22 pips. I scaled-out at 1.3198 giving me a breakeven trade. However, price failed to make a new high. But what was forming was a breakout trade setup. Here it is on a 15 minute chart:



Since I was already at breakeven I was able to trade the breakout without increasing my overall risk exposure. The breakout was spectacular!