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By Walker England, Trading Coach, 02 November 2011 11:57 GMT 
The AUD/CAD continues to be a unique currency as it compares two commodity currencies. The Aussie Dollar has traditionally tied to gold while the Canadian Dollar is directly associated with oil prices. While both commodities have been on a boom, it has been the Aussie that has emerged the stronger currency. Now as the pair created a new high on October 28th at 1.0663 traditional divergence has begun to appear.
Taking Price in to a 1Hour chart we can see a triangle pattern forming on the AUD/CAD pair. Price has formed resistance by connecting the 1.0663 high from October 28th with the November 2nd high at 1.0582. Support is found by connecting the October 21st low at 1.0375 and the November 1st low at 1.0441. After finding these levels, triangle traders will then have a choice of trading a bounce or a break of the support line mentioned above. 
My preference is to set entry orders on a break of support, below our previous low near 1.0415. Stops should be placed 60 points away at 1.0475. Limits should look to first target at 1.0295 for a clear 1:2 Risk/Reward setting. Secondary targets can be placed at 10175. Alternative scenarios include price breaking through support for another attempt at higher highs. Additional Resources Support and Resistance Video Trading Breakouts False Entry Signals ---Written by Walker England, Trading Instructor To contact Walker, emailwengland@fxcm.com. Follow me on Twitter at @WEnglandFX. To be added to Walker’s e-mail distribution list, send an email with the subject line “Distribution List” to wengland@fxcm.com. DailyFX providesforex newson the economic reports and political events that influence the currency market. Learncurrency tradingwith a free practice account and charts from FXCM. DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.
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As you can see, after price establishes a new high – the trader can observe RSI making a ‘Lower-High.’ This denotes to the trader that Divergence is taking place. This is generally emblematic of a previous trend beginning to soften. For example, notice in the above chart, Divergence takes place with RSI after an extended up-trend. Let’s take another look at the same setup as above: 
Notice the extended up-trend that had taken place before the Divergence occurred. The congestion taking place after the first circled high and before the second is what has helped create the Divergence with RSI. The congestion of price between the two circled highs indicates that the up-trend is softening, and perhaps – signaling that a reversal opportunity may be available in the not-too-distant future. This is one of the few tools that traders have available to identify reversal opportunities, and that is why so many traders get excited when spotting this facet of RSI (or MACD, CCI, Stochastics, etc). Not only does Divergence give the trader a potential trade idea; these situations can also offer a compelling risk:reward opportunity. The trader can look to place a stop slightly above the ‘Higher-High,’ and if the stop gets hit – the trader knows that the up-trend is, in fact, continuing. This way the trader can potentially prevent themselves from being over-exposed on the trade. 
If the reversal does take place, the trader can potentially reap a large reward relative to their initial risk. The chart below illustrates what happened in the example above. As you can see, this case of Divergence on RSI helped spot the reversal before it actually took place: 
With any oscillator, whether or not divergence is present, keep in mind: Oscillators can stay Oversold, or Overbought for extended periods of time. Money Management is a critical element for the traders’ approach when employing such methods. If you’d like to be notified of upcoming articles, please email me at JStanley@FXCM.com, and in the subject line, type in ‘notification.’ This is just one of the many strategies that we talk about in the DailyFX+ Trading Room. If you haven’t joined us in the DailyFX+ Trading room yet, please feel free to come by and see what we offer to all Live FXCM Clients. On top of the DailyFX+ Trading Course, we host live webinars 3-4 times per trading day in which we chart and diagram our trades, and student-traders can ask us questions in real-time about strategies, setups, or current market conditions. You can navigate directly to the DailyFX+ Trading Room from the link below: DailyFX+ Trading Room If you don’t yet have a live account with FXCM, you are certainly welcome to request trial access to the DailyFX+ Client Suite that is available to every live FXCM Client. You can request trial access from the following link below (sign-up field located to bottom right corner of page): DailyFX+ Trial Access Thank you very much for your time, and Happy Trading!