The Forex Chronicles

High Probability Trade on S&P 500 – 26 January 2024

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Introduction

Many traders are sceptical about whether or not you can find high probability set-ups on the lower timeframes because the price can move around so fast, and seemingly at random a lot of the time.

However I believe that it is still possible to find good quality trades on these lower timeframes because I regularly take these trades myself on the 5-minute chart of the major stock market indices, and tend to have a decent hit rate.

Some of the very best traders just use price action alone to find high probability trades, such as Al Brooks, for example, but I like to have a few additional indicators on the chart for guidance.

These include the VWAP indicator, the stochastic indicator and several moving averages, and just yesterday (26 January 2024) they all combined to provide a high probability set-up on the S&P 500, as I will demonstrate in the rest of this article.

The Set-Up

As you can see in the 5-minute chart below, the price of the S&P 500 opened slightly higher when the market opened at 14.30 (UK time) before dropping back towards the VWAP indicator (shown in black), where we saw a lot of sideways price action and indecision around this key indicator.

Crucially, the price failed to close below the VWAP and was also trading close to the 10, 20 and 50-period exponential moving averages, so this was all pointing to a possible breakout.

Trade Execution

I was already going into the trading session with a bias to the long side because the trend was so bullish on the higher timeframes.

So when the price bounced off the VWAP, and closed above these three moving averages with one very strong 5-minute candle, I was ready to enter a long trade if the price broke the high of this candle, which it duly did.

The fact that the price closed above the highs of the previous 6 candles and was showing significant divergence on the stochastic indicator at the bottom of the chart just gave me added confidence that this was going to be a strong breakout.

I ended up entering a long position on this initial breakout at 4894.4 and closed half the position at 4900 because this was a major round number that could have acted as strong resistance, and the other half at 4905 after the price had continued pushing higher without any red candles.

As a result, I banked a total profit of just over 8 points from the two positions combined.

Closing Comments

You can see from the chart above that the price of the S&P 500 subsequently dropped back later in the session, but that was irrelevant.

The point is that at that particular time, the indicators and price action were all pointing to a breakout to the long side, and when I see a confluence of indicators like this and a tightness of price action prior to the breakout, this is a time when I like to take a position.

It is rare to see the price of this particular market trading in a narrow sideways range around key indicators at the start of a session, but when you do, you know that in most cases there will eventually be a breakout and a strong surge in one direction or the other, even if it doesn’t last for the whole day.

So it is always worth keeping an eye out for these high probability set-ups because they do come up on a regular basis, even on the 5-minute chart, which is my preferred shorter term timeframe.

They won’t always be profitable of course, but by using tight stop losses, there should be more winning trades than losing trades, and the profits from these trades should exceed any losses that you may incur.

MACD Divergence on the EUR/CHF Pair in 2019

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Introduction to MACD Divergence

The MACD indicator has always been one of the most widely used technical indicators because it tends to follow the trend and the general price movement of a particular market very well, and can be very effective at indicating a change of trend when the two lines cross.

Furthermore, when you combine the MACD indicator with the MACD histogram, you can get some very powerful signals on occasions.

One of the most powerful signals is when the price of a particular market is making new highs, or is making two or more peaks at the end of an upward trend, for example, but both the MACD and the MACD histogram are failing to make new highs.

This will often indicate that the trend is running out of momentum, and it might be worth opening a short position on any big downward price move or any real sign of a reversal.

Real Life Example on the EUR/CHF Pair

If you take a look at the daily price chart of the EUR/CHF pair below, you will see that we had a classic MACD divergence pattern on this particular pair in April and May:

EURCHF MACD Divergence in April and May

The three arrows on the chart indicate the peaks at the top of the upward price trend, and you can see that on each peak both the MACD and the MACD histogram failed to make new highs.

Therefore when the price failed to make another new high and actually moved strongly below the 200-day exponential moving average (indicated by the red line), this would have been a good opportunity to open a short position.

As I always say, you always want to be trading when the odds are firmly in your favour, and when you get a strong MACD divergence pattern like this one, this is a good example of a high probability trade.

If you had entered a short position on the closing breakout candle at around 1.1290, you could have made up to 170 points before there was a reversal.

A Word of Caution

I want to finish by saying that you sometimes need to be careful when looking for divergence patterns, and should only look for the very best set-ups.

Staying with the EUR/CHF pair, the price continued moving downwards, and you can see that there was divergence on the MACD histogram once again, indicating that the new downward trend may have been running out of momentum, but the MACD indicator continued to make new lows, so this would have been a more risky trade.

Indeed you would actually have lost money if you had gone long on the MACD histogram divergence alone, which is why it is better to wait for divergence on both the MACD indicator and MACD histogram when trading forex pairs or any other markets.

Dow Jones Analysis – Positive Divergence Hints at Santa Rally

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December Price Falls

December is usually quite a good month for stock market traders and investors, but this has apparently been the 2nd worst December on record.

The leading stock market indices have all fallen sharply and there are many reasons why. Brexit, interest rate rises, trade tariffs and the threat of a possible recession have all weighed heavily on the indexes this month.

As a result of this, many people have given up on the idea that there will be a Santa rally this year, but looking at the 4-hour chart of the Dow Jones, there is still hope:

Dow Jones Positive Divergence - December 2018

Positive Divergence

As you can see, the price has recently been posting new lows, but if you look at three of the leading technical indicators, you will notice that there has been positive divergence on each of these indicators.

In other words, as the price has posted new lows, the CCI, RSI and Stochastics indicators have all failed to post new lows, and have actually been trading higher, which suggests that the downward move is running out of momentum.

Future Price Move

This positive divergence suggests that the price is likely to move higher in the coming days, but it should always be emphasized that these are all just indicators. The price could easily turn lower and start a new downward wave.

However with just 4 trading sessions left before Christmas, my own view is that we will still see a Santa rally this year, which could then continue until the New Year, as it so often does.

Therefore a price of 24,000 would be my first target, which should easily be achieved if there is such a rally, and looking further ahead, I wouldn’t be surprised it the price went back to the EMA (100) on this time frame, which is currently around 24,500. This would result in a rise of around 3% from the current price level.

As always, these are just my own thoughts and predictions. This in no way represents professional trading or financial advice. You should always do your own research before entering any positions in the markets.

Brent Crude Still Struggling To Break $80

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September Price Action

It has been very interesting to watch the price of Brent Crude this month because it has been getting very close to the $80 level without actually breaking through this key level.

I said before that $80 is acting as strong resistance, and the third significant doji candle from yesterday provides further evidence that the market just doesn’t want to see the price go higher than $80.

In that particular trading session, the price reached a high of $79.69 before being driven back down to a low of $77.81. It then closed the day close to it’s opening price at $78.23, which is why we have another doji candle.

Brent Crude Doji And Divergence

The Significance of Doji Candles

These doji candles generally indicate indecision in the markets, but when they occur at a possible high or low of a trading range and are close to key levels of support and resistance, they often provide good reversal signals, and that seems to be the case here.

Every time there has been a doji candle forming after a flirtation with the $80 level, the price has subsequently dropped and there has been a good opportunity to trade the downward breakout, ie when the price drops below the low of the doji candle the following day.

On each occasion the price has dropped enough to generate a decent profit before resuming it’s gradual upward trend once again, but there are signs that this upward trend is starting to run out of momentum.

RSI and Stochastic Divergence

As you can see from the daily chart of Brent Crude above, the price keeps on creeping higher, as indicated by the rising exponential moving averages, but the RSI and stochastic indicators are struggling to make new highs. In fact the peaks are actually getting lower each time.

So there is clear divergence on both of these indicators, which suggests that momentum is running out and as a result of this, there could be a significant reversal just around the corner. Therefore the 200-day exponential moving average, which currently stands at $72.51, may be a realistic target.

Trading Ideas

I will be watching the price of Brent Crude very closely when the markets open on Monday because it will be interesting to see where the price goes from here. There are potentially two scenarios that could create a high probability set-up:

  • The price drops below the low of the doji candle ($77.81), in which case it may be worth opening a short position a few pips below this level.
  • There is an inside bar whereby the trading range of the entire day (and maybe a few subsequent days) falls within the high and low of the doji, in which case it might be an idea to watch and wait until the price breaks below the low of the doji candle for an opportunity to go short.

If the price goes higher and breaks above the high of the doji candle, then it may finally breach the $80 level, in which case it might be worth opening a long position or forgetting about opening any trades altogether.

With divergence on the RSI and stochastic indicators, as well as a nice doji candle near the $80 level, a short position is looking a lot more appealing at the present time.

As always, I just want to point out that these are just my own thoughts and opinions. I am not recommending any trades whatsoever. You should always do your own research and make your own decisions when trading the financial markets.