Thursday, April 1, 2010

Don't Panic

I'm glad that we got a new high so it will force me to focus on the most unclear aspect of the Divergence Trade of 3's. This is the exit of a losing position. I'm 100% set on the exit is based on the break of bearish divergence (in this case of a short position). The hardest thing to break down is it a break in the trend of the divergence in (3?) indicators or a break as in a new high of the indicators based on the new high of the market? I think it's more of a risk play than an exact rule. I would say a break in trend is lower risk and a break in new high/low is higher risk. This brings another factor to the complexity in developing a strategy is that now, I need to either define it as a high/low risk system or incorperate both high and low risk into it. I'm preferring the latter at this point, but that means more work. So, lets take a closer look of the 3 time-frame charts i'm trading off of. 30,60,daily. Here is the 30-minute chart. and you can clearly see the break in the trend of bearish divergence is being tested but has not broken on any indicators. (You must read the next chart to understand "daily" to understand this. Do not just look at the 30-minute)

Now here is a look at the daily chart. I have already set the rule in play that the exit is "break in divergence" exit must be on the longest-term chart of the 3 your trading. If you notice, we have lots more room on the daily for even more up before the breaks in divergence occur. One thing to look at is the CCI(20). Notice on the daily you see clear bearish divergence yet on the 30-minute it's breaking the high of the last CCI(20). This is where CCI often lies and the rule of exiting off the longest-term chart is a rule.

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