What we are looking for all the time – divergence!

What we are always looking for: divergence!

In this session from the forex trading webclass, Anna explains one of the fundamental principles for trading currencies, which is to identify divergence, which then results in a strong trend.

00:11

Introduction to Pound Aussie and Euro Aussie analysis

00:11

The segment begins with an analysis of the Euro-Aussie currency pair, highlighting a potential reversal forming. The speaker then shifts focus to the Pound-Aussie pair, continuing the previous day’s narrative. By isolating the Pound and Aussie currencies using the CSI index, they note that both have generally been selling off. However, because both currencies moved similarly during this timeframe, it led to a congestion phase rather than a clear trend, contrasting with the Euro-Aussie’s trend.

01:24

Congestion phase and lack of divergence in Pound Aussie

01:24

The discussion focuses on a lack of divergence in the Pound/Aussie currency pair at the moment, noting that the price is currently congesting around the 80 to 55 levels. Using the three-minute chart, an example of congestion is highlighted, illustrating Wyckoff’s second law. The longer the price remains in this congestion phase, the more significant the expected movement will be once a breakout occurs.

02:01

Choosing between reversal or breakout strategies

02:01

The speaker discusses two main strategies for trading: waiting for a reversal opportunity or waiting for a break and congestion. They emphasize that the goal is to identify a trending move, which typically arises after a reversal following a congestion phase. Understanding how price moves is crucial because the market operates continuously from Sunday night to Friday night, with oscillations throughout rather than a single surge at the start. Traders must identify optimal entry and exit points by analyzing these price movements on the chart.

03:15

Understanding price moves: trends, reversals, congestion

03:15

The speaker explains key concepts in trading price action, including trends, reversals, pause points, and congestion phases. They emphasize the importance for traders to understand these patterns and decide which price action suits their style. Divergences, identified through tools like the CSI, are highlighted as indicators of major potential reversals following significant moves up or down. Before reaching reversal points, markets often pass through congestion phases characterized by sideways movement, especially on slower or higher time frames, which can trigger reversals on faster time frames.

04:20

Russian doll analogy for multi-timeframe price action

04:20

The speaker explains the concept of price action resembling a Russian doll, where patterns repeat on different timeframes from daily to smaller intervals like 5-minute or 3-minute charts. Within the oscillations seen on higher timeframes, such as hourly charts, there are reversal opportunities on faster timeframes. The speaker highlights the value of observing divergences and price congestion phases to identify potential reversals, even if a big move has already occurred or was missed.

05:24

Using CSI to identify market conditions and frustrations

05:24

The CSI indicator highlights trades and reveals the condition of price action. When lines cluster tightly in the middle, it indicates movement without significant range, suggesting patience is needed. Such patterns often lead to trends with many pause points, causing congestion and potentially frustrating trading days. Unexpected volatility or news reactions can increase this frustration. The example given is a three-minute chart of the pound-ozzie, which remains in congestion despite prior movement.

06:32

Renko charts smooth out trends and pullbacks

06:32

The speaker discusses price movements from around 81-82, focusing on the use of Renko charts set with fixed three-pip values to smooth out market choppiness and pullbacks. Renko charts help identify smoother trends by filtering out volatile fluctuations, aiding traders in staying within significant moves. The analysis highlights multiple small pullbacks before entering a congestion phase, which acts as a key signal area. The speaker emphasizes the importance of using non-time-based charts like Renko alongside multiple time frames to better predict if a move will continue or reverse based on congestion and calculated levels.

08:27

Key resistance levels and waiting for divergence signals

08:27

The discussion focuses on potential upside levels in the market, highlighting key resistance points labeled as R2, R3, and the crucial R4 level within the current timeframe. The speaker examines hourly and 10-minute charts to identify relevant price points around 8282. The CSI indicator at the bottom shows no divergence yet on this timeframe, but a divergence may appear on the 3-minute chart as both indicators currently move in the same direction. The Renko chart, which captures real-time price action, fluctuates between bright blue and dark red, indicating uncertainty. The overall message stresses patience as the market decides whether the British Pound will experience increased buying or selling pressure.

10:15

Asymmetric moves in Pound Aussie and trade considerations

10:15

The speaker explains the behavior of the Australian dollar in comparison to the British Pound, noting that the Aussie can remain oversold for longer than expected. Unlike the Euro pair mentioned earlier, this pair shows an asymmetric movement rather than equal buying and selling pressure. Traders need to assess the direction and potential stopping points of this asymmetric move and decide whether they prefer balanced trades or are comfortable with the current imbalance. The discussion also touches on volatility and position sizing, emphasizing the importance of having a clear trading process.

11:58

Managing volatility through position sizing strategies

11:58

The discussion focuses on managing market volatility through position sizing. In volatile environments, traders can reduce their position sizes to better control risk when entering or managing trades. The speaker then invites David to share his thoughts on the topic before continuing with observations on the pound and Aussie currencies.

By Anna Coulling – creator of volume price analysis