I wanted to do this as a separate post so that I could use a real live example of something that often happens in the markets and traps many traders who get over-anxious and have happy trigger fingers.
In my last post on this pair (see Related Ideas: "AUDUSD: Watching For The Sell Signal"), I said that I am NOT YET in on the sell on this pair though I am also anxiously awaiting it. Some of you might be wondering what I am waiting for? Why have I not yet gone SHORT on this pair?
I've said it before and many times and I even did a post on it (see Related Ideas: "USDCAD: Why you SHOULD NOT BUY now! A Lesson On Trade Entry.") using another pair as an example. But seeing as there weren't that many LIKES on that post, I'm guessing many of you probably poo-pooed it as non-sense. Well, if you go back and look at that post and then look at what happened in USDCAD since then, you'll see what I meant.
Let me first say that for some of you, what I am about to say doesn't matter because maybe your trading plan and risk tolerance are such that you don't need to worry about "getting in too soon". But for many of you, it might matter. Let me go back a few days about 6 days ago when prices were still in what we now know was a powerful move up. I posted this post:
I had posted that because at that time, I had many PM's and comments asking me if it was the right time to go SHORT. I was wondering why so many people wanted to sell at the time? I even saw many posts that were also calling for a SHORT. Ok, so now zooming to the present time. We again have a situation where there are even MORE posts calling for a SHORT. But this time, I'm also one of them. BUT I have not SHORTED this pair just yet.
Here's what many trader's do not recognize when they "jump the gun": there isn't any bearish PA yet! why is it important to wait for PA to signal a trade when almost ALL the other indicators are SCREAMING to SELL? Because PA is the ultimate indicator, IMHO. Here's what could happen....
As of the time of this post, there is another 2 hours to go for this current 4 hour bar to close. On the 4HR chart below, there is no divergence yet but the RSI is way overbought. But in the 1Hr chart in the MAIN chart above, you see divergence and you see a pinbar. Oh! It's so exciting to see a pinbar! Let's ALL SELL!!! Whoopeee! Not so fast, my friend. First, let me say that I don't trade off pinbars as my personal opinion is that they are FOOL'S GOLD! This is a novice mistake that when a pinbar appears, novice trader's seem to automatically hit that trade button. The seasoned trader's recognize that pinbar ass a trap! And though you see one clearly on the 1HR chart, there is none on the 4HR chart.
Now back to that "divergence" thing I mentioned. There is something I like to call "trickle up" divergence. What is that you ask? Probably never heard of it, right? Briefly, it is simply that when you see divergence on a lower TF and not on the next higher TF, there is a good chance that prices will continue to go up yet again before dropping (in the case of overbought scenario) thus causing a divergence to also occur in that next higher TF. I've tried to illustrate this here in this 4HR chart....
This is NOT a rule but is a generalization as it is not always the case. So why is this important and why am I bringing it up now? Because this is a distinct possibility in this pair and I bring it up to also illustrate the importance of being patient and waiting for PA to signal a sell or else you just might get trapped!
CONTINUED IN COMMENTS SECTION BELOW.....