Why did I sell in the middle of the channel? One reason was the breach of the trend line as mentioned. Another reason was RSI behavior on the 1-hour chart. It couldn’t seem to rally above a certain point and I considered that bearish, given its strength in recent months. A third reason was that the pair was top heavy as I had pointed out. In addition, when price rallied to the support that was now resistance, upper shadows appeared on the candles. This is a hint that the market is rejecting higher prices, particularly when it occurs at resistance. Finally, I had already been short (a trade I did not blog about and will not count toward monthly pips here) and had recently been profit stopped. I wanted to get back in on the slight rally. That’s not always smart but I could justify the trade based the factors above. Always be able to spell out your reasons for a trade. If you can do this, it’s a good trade even if it doesn’t make money.
The pair sat overnight and is still sluggish, showing only +64 pips so far. I’m going to move the stop to breakeven, take off a small portion of the trade at +64, and watch short-term price action carefully.
Here are the charts:
© 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.
Confused. According to your first paragraph it sounds like you were long and sold but RSI was low which means that it was oversold and should mean price should continue up.
ReplyDeleteAnother reason was RSI behavior on the 1-hour chart. It couldn’t seem to rally above a certain point and I considered that bearish, given its strength in recent months.
ReplyDelete--At what point should I consider RSI to be bearish?
A third reason was that the pair was top heavy as I had pointed out.
--Can you explain top-heavy?
Hi Ward,
ReplyDeleteThanks for reading and for your comments.
In my first paragraph, I wrote that RSI was declining as well as price. I use RSI in several different ways. One is for divergences (e.g. price declining but RSI rising which is bullish. Clearly that's not happening here). Another way I use it is as a measure of momentum. I've mentioned several times in the last several weeks that momentum (as measured by RSI) is staying up which which would prevent a big price decline. This is the first time it's dropped and I was pointing that out. Given the other clues that the pair is weakening this was significant. RSI being down doesn't always mean price will go up. RSI can stay oversold for long periods of time. Also, any indicator is just confirmation and one can't take trade off of indicators. One must trade price action. But the indicator can provide a clue and this can be valuable. So, yes, I entered another short.
As to top-heavy, thanks for pointing out I'm falling into jargon. I'll try to avoid it. What I meant was that if you look back over some of my posts on Euro, e.g. the Elliott Wave count ones, etc. you'll see that I've been suspicious of this move up. I have considered it a correction from the low achieved this past winter. Some patterns that have been forming lead me to believe it might be weakening. It also has had a strong, sharp uptrend. Sharp ascents (or descents) are usually not sustainable. All these things led me to use the phrase top-heavy to mean I thought it was more likely to fall than to continue to rise.
I forgot to address your comment about when you should consider RSI bearish. This varies depending upon the pair. However if you study RSI behavior over a long period of time, you'll see that during uptrends it tends to drop no lower than certain levels and during downtrends it tends to rise no higher than certain levels. So it stays in a range depending on whether price is in an up or down trend. I'll try to poing this out on an upcoming chart in my blog so keep reading.
ReplyDeleteThanks,
Dianne