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.
Divergence helps the trader recognize and react appropriately to a change in price action. It tells us something is changing and that the trader must make a decision about the trade.
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