April 27, 2010
Double Bottom + Divergence = High Probability Set-Up
I want to share with you a trade that I placed this week on the EUR/GBP pair because this was a perfect high probability set-up. I was looking through the various pairs to see if there were any set-ups that satisfied the criteria of my main 4 hour trading system, when I noticed an interesting pattern forming on the EUR/GBP pair.
It was clear that after a big sell-off there was a nice double-bottom forming on this pair. This was enough to get my attention, but I also noticed that after the price fell and formed a second bottom, there was a clear divergence pattern on both the MACD and Smoothed Repulse indicators, as you can see below. In other words the price was heading lower, but both the indicators were failing to make new lows. On top of that the price was getting close to the current Supertrend level but was struggling to break through it.
So as a result of all this, I knew that if the price headed higher and bounced off these lows, the divergence pattern and the clear double bottom would provide me with a very high probability set-up, and this is exactly what happened. The fact that it bounced off the Supertrend indicator lent even more support to my long position.
After the 4 hour candle closed yesterday evening, I entered a long position straight away at 0.8649 and set my stop loss a few points below the most recent low at 0.8599. I used the Average True Range (ATR) indicator to show me the current range and this gave me a price target of 30 pips.
I used quite high stakes for this trade, as I do for most of my high-probability trades, and I'm glad I did because this one worked out perfectly. My 30 point price target was triggered overnight with no problems at all.
Anyway the point of this post was to show you another example of a high probability set-up because these rare set-ups can generate some excellent returns.