Bearish Divergence: A bearish divergence occurs when the price forms higher highs, but the oscillator (like RSI or MACD) forms lower highs. This suggests that buying momentum is weakening, and a downward reversal might be on the horizon. 3. Trade Setup:
Entry Point: Consider entering a short position if a bearish candlestick pattern forms after the divergence confirmation on the 1-hour chart. Look for strong confirmation like a bearish engulfing or shooting star pattern.
Stop-Loss: Place the stop-loss above the recent swing high on the 1-hour chart to manage risk. This positioning protects against an unexpected upward move.
Take-Profit: Identify key support levels for take-profit targets, aiming for a 1:2 risk-reward ratio. Target areas could include previous support zones or Fibonacci retracement levels.
4. Risk Management:
Position Size: Calculate your position size based on your risk tolerance and the stop-loss distance. Typically, risk only a small percentage of your capital (e.g., 1-2%) on this trade.
Risk-Reward Ratio: Aim for at least a 1:2 risk-reward ratio, meaning that your take-profit target is at least twice the distance of your stop-loss.
5. Additional Confirmation:
Volume Analysis: Check if there is a decrease in volume as the price reaches higher highs. This can add weight to the bearish divergence setup.
Support and Resistance Levels: Ensure the trade setup aligns with strong support and resistance zones for additional confirmation.
6. Trade Execution:
Place Orders: Set your sell order, stop-loss, and take-profit levels based on the criteria above.
Monitor the Trade: Keep an eye on the trade and adjust the stop-loss to break even or trail it if the price moves in your favor.
7. Review and Adjust:
Post-Trade Analysis: After the trade closes, review the outcome to understand what worked well and any areas for improvement in future trades.