I blogged on Tuesday that this pair might be heading for a buy setup and that the price to watch was 1.0492. To quote from that posting, "it would be nice to see RSI above 30 on the daily chart. One way to gauge this is to watch the hourly and see if it dips back below 30 and then closes above it".
Price was hit overnight but what about RSI? On the daily chart RSI is still below 30; on the hourly it dipped below and has just had a candle close slightly above at 30.31. That candle was an inverted hammer. Inverted hammers are those that occur after a downtrend (we have that for sure), and have a long upper shadow and little or no lower shadow. This candle meets all those criteria but it will only be confirmed if there's a higher close in the current candle forming.
Price has touched a low of 1.0455 as I write (8:01 AM EST). From 1.0422 to 1.0455 there is a strong price support. That means I can have a reasonably tight stop. There's also some positive divergence on the daily and three-hour chart.
So I bought at 1.0469 recognizing that this is trade that many would not take. But that's true of many of my trades. However I have four pieces of evidence (price support, positive divergence, RSI close values, and candle formation). I can also have a tight stop. All that makes a good trade by my criteria, even if the trade goes on to lose money.
If the pair breaks 1.0420 with a decisive move (none of this namby-pamby stick my toes in and see if it's cold in there business) then the next logical support is 1.0283, 1.0138 and .9912 (bummer, the dollar bulls would say). Resistance is at 1.0492, 1.0586, 1.0631, 1.0676 and….well, let's stop there and see what unfolds over the next few hours.
Here's the hourly chart:
© Dianne Fecteau, 2010. 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.