The three-hour chart today shows the pair bumping its head on a downward sloping trend line. It’s well above its original uptrend (black) line which shows strength, as is the RSI. On the shorter uptrend line (in blue) it is reflecting divergence with RSI.
Ideally the indicator should move in the same direction as price. When both move together the indicator is confirming the price. If they move in opposite directions—price is moving up but the indicator is moving down or vice versa—it’s called divergence. It’s a hint of market weakness. Divergence can signal price is ready to reverse but it’s only that—a signal and not a guarantee. One big mistake a trader makes is to base trade decisions on only one thing. Divergence is a piece of the puzzle but it’s not enough to base a trade upon.
In this case, since the pair is obviously fighting resistance I’m not too worried about it. But I’m on guard and probably would not open new positions until it clears some of these hurdles or has a good pullback. A pullback to the blue uptrend line would be a buying point (around 1.0700/50 but you’d want tight stops) as would a pullback to the black uptrend line (around 1.05). There are not good hints for a short here but if one did so the stop should be above the recent high of 1.0875. Here’s the three-hour chart:
I am still in three positions. I lost one of my recent ones when it stopped out 10 pips above breakeven last night in a downdraft. The oldest one is up 378 pips, the second oldest 153, and the third 77. Unless we have another good pullback I’ve stopped buying until the pair shows it can clear the hurdles ahead.© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.
My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.