The EUR/JPY has sold off this trading week from Fridays high printed at 105.68. Moving as low as 103.62 on December 6th, traders are left wondering if the pair will make an assault on fresh highs over 105.68 or break below our previous low. One tool traders have available to spot market reversals and continuations are divergences between price and indicators.
Taking Price in to a 15 minute chart we can begin to see traditional divergence form on the EUR/JPY. The pair has recently established a series of lower lows by linking the December 2nd low of 104.11 with the December 6th low of 103.62. Traditional divergence is found, when we compare the MACD indicator with price. Below we can see the lower lows printed by price mentioned above, matched with higher lows printed by our indicators.
This separation is the first clue that we may have a reversal on our hands. It is imperative to trade divergence as you would any other indicator and not rely on it completely for entry /exit signals. I prefer to use divergence in accordance with a breakout strategy. In a down trend, divergence paired with higher highs created on the graph can give us ample chances to buy.
My preference is to place entry’s on the EUR/JPY at 104.50 Stops can be placed under the previous low at 103.50. Limits should look to take 200 pips profit for a clear 1:2 Risk/Reward ratio.
Alternative scenarios include price continuing to move lower, negating divergence.
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---Written by Walker England, Trading Instructor
To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.
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DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.
