Friday 5 March 2010

Bullish Over/Under Divergence $Yen trade setup

Ok, If you read my post on Tuesday 23 Feb 2010 you will see that i explained my take on a divergence trade setup method using two stochs in one window. This process is used to help confirm a possible trade but is not a trading system on it's own. It is particularly important when trading with Median Lines as it helps identify market tops/swing highs and bottoms/swing lows. In this example (from Yesterday 4th March 2010) we see a bottom formed and it is confirmed by divergence in multiple indicators and multiple time frames and the over/under stochastic.



In the 60 min USDJPY chart above you see price descending and making the first swing low at 88.30 on the 3rd March. Price rallies and then makes another lower swing low ( This setup only works with a second lower swing low not identical S-lows (double-bott) or rising swing lows) at 88.13. There is a possible 2B reversal TS here as well but it is not as well defined.
Again as in the swing high/market top on 23 Feb we use the same criteria and the same Stoch settings 7-3-3 & 21-10-4 both in one window. I have the signal lines dotted and the main Stoch as a thicker line.
1.Price makes a new swing low (88.13).
2. The 7-3-3 is making a higher low than on the previous swing low ( in this case marginally higher but it is definite and good enough & confirmed on the 30 min chart). see the two light blue arrows in the x 2 stoch window.In addition the signal lines also are in this order of the 7-3-3 dotted signal is making a higher low than on the previous SL.
3.The thick magenta coloured 7-3-3 is above the thick white 21-10-4 in the current swing low ( and the dotted signal lines in the same position ie the magenta above the white) and vice versa for the previous swing low. in other words the magenta 7-3-3 was below the white 21-10-4 in the previous SL (and the signal lines in the same order of position...dotted magenta below dotted white).......so far so good!
4. Price then rises from the last swing low and eventually a test bar takes out level 'A' ( and the centre of the 'back'( 88.61) where i guess the stops are and price rises sharply.It is then essential the next bar must take out the high of the previous test bar and both stochs rise sharply.
OK ..so i am always watching out for this trade and as a Median Line/Pitchfork trader it is an invaluable tool BUT in addition we also have confirmation on the 7-10-5 MACD showing bullish divergence in more than one time frame & also we have further divergence confirmation on the RSI (not shown here but check it out).This is all finally confirmed as a trade entry position confirmation by the crossover of the 10,20&30EMA up through the 60EMA & as the stoch's continue to rise we get long $/short JPY @89 .14

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