Retest of support / resistance (kissing the the breakout point goodbye)

January 18th, 2008 expert

Online Forex Trading concepts: Double Top reversal price patterns, Momentum divergences, Moving average crossovers, Trendline violations, retesting of support / resistance, trading signals, trading targets.

Although not a spectacular gain, the EURGBP provided a great example a technical analysis principles working together to provide a good technical trade.

The EURGBP was trading in an upward sloping channel. A double top formation (reversal price pattern) was formed. At the same time sell divergences were made on the MACD momentum indicator which gave a forewarning of a possible sell transaction. Further more the MACD crossed over the 50 line a went into the sell zone. The 4 and 6 moving averages based on the price highs gave a crossover sell signal. The final sell signal came when the price violated the lower channel line / trendline. Normally this would trigger the sell transaction. However we missed it.

In general it is not a good idea to chase a missed entry. When there is a trendline violation the price often returns to the trendline for a 2nd time before it resumes the trend. We made use of this principle to place a sell order behind the price near the violated trendline. In this case the price did retest the trendline (Support become resistance) triggering the sell entry and then heading south as all the signals indicated. We exited before the last low which represents a support level.

This raises the point that traders need to establish which technical analysis indicators are SIGNALS and which ones are TRIGGERS. Signals warn about a possible transaction but the TRIGGER is the activity that creates the entry. In this case the double top, the moving average crossovers, the momentum divergences, the MACD moving into the sell zone were all SIGNALS. The trendline violation would normally have been the TRIGGER for the transaction but we missed it so the retesting of the violated trendline became our TRIGGER.

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