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RSI Hidden Divergence Forms on EUR/CAD Under 1.3500

Monday, 27 February 2012 21:07 GMT

by  Walker England , Trading Instructor,

Hidden divergence takes advantage of price seperating from the RSI indicator. As the EUR/CAD forms a lower high in a 610 pip downtrend, hidden divergence can be a signal for fresh entry positions.

The EUR/CAD is a great currency trade for those that want to take advantage of the Euros prevailing fundamental weakness and the CADs correlation to oil. At best the European debt crisis is still in flux as the Troika continues to work on austerity measures in Greece. This has directly caused uncertainty in the Euro currency. In contrast the CAD has done well on increasing crude oil as one of the world’s leading crude exporters. One way to size up this disparity is to move directly to a daily chart.

The EUR/CAD daily chart depicted below has been steadily trending downward since the June 8th high posted at 1.4379. Our current low from January 17th stands at 1.2869, but price has retraced as much as 610 pips to today’s high at 1.3479. As prices move against the trend, savvy traders may employ a variety of swing trading techniques to enter the market in the direction of the larger move.

RSI_Hidden_Divergence_Forms_on_EURCAD_Under_1.3500_body_Picture_2.png, RSI Hidden Divergence Forms on EUR/CAD Under 1.3500

One way to find a swing back in the direction of a long standing trend is by using hidden divergence. Divergence is a method of comparing the separation of price and an indicator as they head in two different directions. Below we have an example of hidden divergence on the EUR/CAD 8hr chart. To spot divergence inside of a down trend, we need to connect our previous and current highs marked on the graph. Now, we need to connect the same points on our RSI Indicator.

Once hidden divergence is found a variety of trading methods may be used. The simplest form of execution is utilizing the built in overbought / oversold levels on RSI. Traders will wait for a candle close and watch RSI move back below the overbought level of 70.

RSI_Hidden_Divergence_Forms_on_EURCAD_Under_1.3500_body_Picture_1.png, RSI Hidden Divergence Forms on EUR/CAD Under 1.3500

My preference is to sell the EUR/CAD on RSI returning under 70 (overbought) Entry’s should be near 1.3350 or better. Stops should be placed over resistance near 13500. Primary profit targets should look for a minimum of 300 pips at 1.3050.

Alternative scenarios include price breaking resistance to form higher highs.

---Written by Walker England, Trading Instructor

To contact Walker, emailinstructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.

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