Trading "RSI DIVERGENCE"

This post is based on one of my intra-day trades closed on 16th Jan,2017. As a short setup I found combination of  "rising wedge" chart pattern and RSI momentum indicator, as quite interesting and effective. In the candlestick chart seen above we can observe a "Rising Wedge" pattern.

Apparently looking at the rising wedge, it seems to be in uptrend, but actually it is not. The trend-lines converge and forms a cone like structure, but as the buyers loose interest over time,chances are higher for break-down from trend-line support. As a confirmation I used RSI to measure the strength in momentum. After observing RSI negative divergence(bearish), it was not much difficult to predict the bearish direction for next immediate price action.

Near the 3rd contact at the resistance trend-line, as the breakout turned out to be weak and price fell below trend-line resistance, that's when I entered a short trade near 307-308 with a stop loss of 310. Target was EMA 20 at 301 around. Results were quite satisfying and as expected price started dropping towards 301 and below 300 to 298. I closed the trade near 301.5 as it nearing day's close.

Rising Wedge:  A rising wedge is a pattern with prices bouncing between two up-sloping and converging trend-lines to form a cone like structure.

RSI: RSI is a popular momentum - oscillator indicator. Divergences signal a potential reversal point because directional momentum does not confirm price. 
RSI negative divergence forms when the price of the stocks records higher highs but RSI records lower highs.


Disclaimer: Although the details shared above are from real trade, but the purpose for sharing this post is entirely for study purpose.

Trading "V" pattern for whopping 26% return in 1 month

Most of the reversals both Bullish Reversal or Bearish Reversals can be identified using candle stick chart patterns. The "V-bottom" is a V-shaped bottom and as the name suggests, it indicates sharp pullback after sudden price drop. After sudden price drop  if we observe candle formations like "Morning Star", "Morning Star Doji","Hammer" it could be an indication for a probable bullish reversal. But the confirmation for this pattern comes from the third candle which has to be a "Full-Bodied Green Candle" and more importantly, the low of the third candle must be above the low made by the previous Doji Candle.

Learn from Real Trade

 After sudden price drop from 179.7 to 117.85 in just two months (Oct-Nov), on 5th December 2016, I observed a Doji candle in the monthly chart of "Future Retail" / NSE. This Doji candle made a lower low at 115.45 (Doji candles show indecisiveness for investors, where investors are not sure whether the price will fall further or if the price fall will be arrested).

In the lower time frame chart (weekly/daily) when I observed some buying interest above 115.45, I entered into this trade at around 120 with a stop loss at 115 (0.45 points less than the previous low). That means even if stop loss was hit, the risk for this trade would have been 5 points.

Targets were 137, 145, 150+ levels as I was expecting some pullback to historical resistance levels. Planned reward was minimum 3 times the risk.

Reward:Risk = 3:1. For me, having reward:risk ratio more than 2:1 is an important criteria for trade selection or to enter any trade.

But confirmation for this trade came when next month (Jan 2017) it opened at 129.5 and headed higher. Some pullback was inevitable, and the result is just in-front of us.Today I closed the trade with more than 26 % positive returns in less than 30 trading sessions.

Happy Learning. Learn and Earn.