Simple trading with S/R levels and stoch divergence

Hi there,
I'm writing this journal for two purposes. The first is to give back to the site after I've spent so long learning (as well as being distracted by if I'm honest) from it.
The second is less charitable-it's to make sure I document all my trades, both the good and the bad, so the embarassment/annoyance at taking an unplanned trade and having to share it will hopefully help my mental strength.
If no-one reads it then it's still all good as I'll still have to air my dirty linen, if only to myself.

It is no black box system so anyone who wants that then stop reading!
It is a rehash of pretty much most common sense stuff you might have read, but with my own comments that will hopefully make sense/give some guidance.
Note, just sticking with one currency pair is more than enough work, and will provide you with more than enough income. Don't try to analyse the £, $, yen etcetc, you just lose focus. Start with Eur/USD, it has low spreads and is volatile so it's all good.

What you need to do:
Learn about Support and Resistance levels.
http://www.nobrainertrades.com/2008/...ak-levels.html

Learn basic chart patterns (flag, bottom of the bucket etc
http://www.nobrainertrades.com/2008/...of-bucket.html

Learn the 4 types of stoch divergence shown here (the Type 1 and Type 2 diagrams are the most helpful)
http://www.elitetrader.com/tr/index....8&action=print

Learn how to draw trendlines.

Learn Fibonacci retracements. This is actually common sense with a fancy name. Reversals for a trend to continue tend to occur at the 50-62% retracement levels. I don't really draw them anymore.


The system:
I use Alpari UK Metatrader for charting

Chart setup: 8/2/2 stochastics on each timeframe EXCEPT FOR 1 MINUTE CHART-NO INDICATORS ON THIS TIMEFRAME.
Price field set to low/high, MA method-Linear Weighted
Price set to OHLC bars (you can use candlesticks if you prefer it).
3 timeframes per pair: 1 hour, 15 mins, 5 mins

So now, it's all set up.

To start with, look at the 1 hour chart, and also have a brief flip onto the 4 hour/1 day chart.
Draw lines of major Support and Resistance horizontally across the chart.

TOP TIP
Use a different colour line for the 4 hour/Daily S/R levels, these will be strong areas of interest, and as such should be given a different weighting+a quick way of identifying them to separate them from the 1 hour/15 min levels.

TOP TIP
The 1 hour chart is excellent-it's a long enough time frame to show where you are in the overall bigger trend, but is also an excellent tool for intraday trading. If you're getting a bit carried away looking at 5 min charts (try to avoid looking at them too much!) and all the changes of direction, look at the 1 hour chart- you'll calm down immediately.

TOP TIP
If you're not going to draw them in because there are so many lines (especially on the hourly chart) then be aware of the 50 and 00 price levels. Traders tend to want to hit them, it's kind of a sport, and prices can reverse in these areas, especially the 00 level.

Then draw the same levels of S/R on the 15 min chart.
Then draw the same levels of S/R on the 5 min chart.

This sounds like a lot of work, but it becomes second nature, and you'll breeze through it very quickly with practise.

Analysing the charts/the set up
So after all that, what are we doing, what's the point of all this?

It's simple, price tends to react at S/R levels. If price approaches resistance, it tends to retreat/go lower.
If price approaches support, it tends to bounce up.

But of course, this is not guaranteed to occur.
So what tools do we have that can predict more accurately when these reactions will occur at these S/R levels?

This is where stochastic divergence comes in. Used correctly, it is a VERY powerful tool.

So, armed with your S/R levels derived from your hourly chart, you watch and you wait.
We're looking for prices to approach these S/R levels, and when they do, we switch into stochastic divergence hunting mode.

So, if price is reaching a support level (a significant previous price low), and we look at the 15 min chart and the 5 min chart and we see stoch divergence then we are primed and ready to enter. Sadly, this is no exact science. You can set a limit order at the exact level of the previous S/R, or you can enter before the price reaches it with a wider S/L.
I would recommend an S/L of approx 15-20 pips.

ENTRY TOP TIPS
Please believe me when I tell you this-it will save you time and money and grey hairs.

1) If divergence is only showing on the 5 min chart but not the 15 min then DO NOT ENTER. I tried to make this work with just the 5 mins so I could get massive pips and with small S/L levels for great risk reward ratios and I can tell you this-you will get burned too often. So don't do it!

2) 15 min divergence is awesome. That's not a technical term is it, but I really have to make that point.

3) Don't overtrade, if you can't work out if an S/R level is important or not then it probably isn't. So don't try to convince yourself that it is.

Examples, with charts, to follow.

Trade taken this afternoon on EUR USD.

Look at 15 min chart-price is approaching an area where price action has consistently been unable to breach. Not showing abig divergence on 15 min chart though.

1 hour chart chart
Price shows divergence (again-not massive divergence though) while this price level. If divergence shows on 15 min/1 hour chart then it's a powerful sign when allied with an approach to an SR level!

Finally-here it is on a 5 min chart.
Again, it's not huge divergence, but I was confident enough, thanks to the 1 hour divergence, that it was going to turn.
And it did.
3 price targets hit, currently at +75 pips for last quarter of trade.
Ah screw it closed out as if you look at 15 min chart-looks to be at a 50% retrace level, it's at the 50 price level, and ther'e previous support there.
Please note, I always take my profits too early-just wait for ther next trade examples I took earlier today...

EDIT
To show how rubbish I am at picking profit levels, after I finally exited the trade, the price has dropped another 30 pips and counting. AAARRRGGGGHHHHH

EUR USD long trade taken this morning, look at vertical red line.
Now this is divergence:
5 min chart at 8.45am (Alpari time)
15 min chart-lower price but rising stochs. Combined with an SR level and I'm in...
1 hour chart-no divergence but stochs were in the oversold area. And price was at a very obvious support level. See what I mean-if you can spot it straight away on an hourly/4 hourly chart then it's good, obvious support.
If you can't spot it, then it isn't good/obvious support so don't bother. Remember, deciding not to enter a trade is a trading decision in itself, and is just as important as deciding to enter.

Finally, here's the 1 hour chart showing the big S/R level.

You'll notice that the 5 min/15 min charts didn't clearly show it (well at the time I think the 15 min chart might have done but time has moved on, with more bars to show for it, since then).

When you see it like that, then I hope you realise just how important it is to look at the 1 hour chart (whilst flipping quickly and occasionally to the 4 hr). You get so much more of a feel for price action than if you are just looking at a 15 min/5 min chart.

Yopu can see that the price overshot the support level. Very true, and you could've been stopped out if just entering on the price level alone. But switching to look at the 5 min chart and waiting for divergence to occur, with it also showing up on the 15 min chart, means that you enter later, but with more assurance that price has changed direction.

Here is a current example of when NOT to enter-even though it's tempting as hell.

Price has reached a 50% Fib Level (ish), and it also looks like it's hitting a good resistance level, and it's also at the 50 price level.

But there is no stoch divergence showing on the 15 min chart or the hourly chart. But there sis on the 5 min chart so why not enter?
1) It's not a clear price level on the hourly
2) You never enter using JUST 5 min stoch divergence (the yellow dotted line on the chart).
So stay away!

GBUSD short taken 7.32am UK time, Alpari chart is an hour ahead so will say 8.30am for some reason.

Price near 00 levels, price also reaching resistance point on 1 hour chart.
1 hour stochs not showing divergence, 15 min charts are showing divergence (higher high in price but lower stoch level). Also confirmed on 5 min chart so am in like Flynn. Let's see how it pans out...

5 min chart-sorry-the vertical red line showing entry at 1.5591 does not show up.
SL at 1.5607
First resistance at 1.5562, Profit target is 1.5535 area (a bit higher than that in case of a bounce).

I'm rubbish at taking profits, am 22 pips up already so 1.5 RR but 15 min divergence is usually quite strong so after yesterday's early profit taking debacle i'm going to try and sit this out. So watch price reverse and come and take me out

Have just missed similar set up on eurusd as was typing out these messages-shit-shows divergence on 1 hr/15 min and 5 min chart so could be a big one-would be up 30 pips already from entry level.

EDIT Stop moved to break even on GBUSD-let's see if it can decisely break that pesky 1.5565 area...
15 min chart showing divergence (lower low but higher stoch level) but will stick with it as 1 hour chart is showing divergence so that implies more major price weakness. We shall see....

I have exited my GBUSD short at a 1:1 RR.

The reason-HUGE divergence on the 15 min chart where price broke an intraday support level but the stoch remained a lot higher. These are your bread and butter-I was making breakfast when this occurred. I would have entered long as a hedge but would have taken profit at 1:1 RR.

I could be wrong of course, but when the divergence is that big and occurs near an S/R zone you have to take notice.
I would have traded that long, drilling down to a 1min chart to look for further divergence (which occurred) at, or near, the support level 0f 1.5564.
Note that i don't enter on the touch of the support line, you look for the price to make divergence when it nears that support line, and when it does, that is when you enter. You have to wait-if divergence doesn't occur then you just don't enter!

Charts attached. A battle is going on in this area right now-wonder which side will win?
Same thing as occurring in EURUSD although the hourly chart/price action looks weaker on the longer term but damn that's some big divergence on 15/5 mins...Am just not sure so staying out on that one-missed the opp to go long anyway

EDIT
Aaaargh my rubbish profit taking strikes again haha-GBUSD spiked down, EURUSD spiked down.
A great lesson-ALWAYS pay more attention to hourly chart divergence-it trumps the 15 min divergence, just as 15 min divergence trumps 5 min divergence!

Hmmm eur usd at 00 levels and good support level on 15 min, divergence on 15/5/1min charts....

OK I'm missing way too many sweet trading opportunities thanks to this blog-not sure anyone was reading anyway, at least I tried to help. Adios!

hey i would like to know whats the overall success play divergences of s&r levels

I think you mean In Like Flint, 1967, starring James Coburn, follow up to Our Man Flint.

I stumbled on your post just now, i have been toying with the idea of trading divergence around S/R zones but my problem is how do i determine strong support or resistance but with your simple analysis of 00 and 50 levels i think i have something to work around, i will backtest it myself and i will come up with a trading plan around it.

Your post has been very very helpful to me thanks so much i really appreciate it, more grace to your elbow