28 Nov 11 - EUR/USD - M15 - Bearish Bat Pattern - Type 1 and 2 Reversals

This is a very classic Harmonic Trade at play and one which I missed while I was not at my computer. However, it was such a nice trade with so many learning points that I decided to post to remind myself of such trades and that we should be looking for such high probability trades.

Distal (H1)

In this time frame, there was nothing much supporting the trade in terms of the RSI condition. The only factors here that are supporting the trade execution were the following:

1. Price action was trending down in a falling channel.

2. There was a resistance seen at the 0.50 Fibonacci Retracement Level when the pattern completed. (Refer attached chart)

Primary (M15)

The price action tested at the predetermined PRZ between 1.33590 to 1.33912 and the establishment of the Terminal Price Bar marked the completion of the pattern. After the establishment of the Terminal Price Bar, the price action begin roll over and signal some price stabilization which was key to indicating that there was some reversal at hand.

This was the natural reaction for Type 1 Reversals. However, this move was avoided as there was no proper entry point prior to this move and since I was looking for confirmation factors, this move actually set me up for a second entry which was the Type 2 Reversal. There was an uptrend trend line violation after the price reversed out of the PRZ and that was not an ideal entry point as I will always look to execute within the PRZ or even slightly beyond it. An analysis on the Proximate time frame will further clarify my analysis later. There was more confidence in taking on the Type 2 Reversal was also due to that fact that the RSI has tested the extreme overbought area and started to roll out of the zone which indicated that there was some weakness in the pair.

In addition, the high of the Terminal Price Bar was not taken out and it also acted as a resistance which gave me even more confidence to take the Type 2 Reversal. In addition, with a Type 2 Reversal in play, we will usually expect a greater move in the price action.

Proximate (M5)

The Proximate time frame will give us an early indication as to whether we will have a valid reversal at hand. As seen in the attached chart, the Type 1 Reversal occurred nicely but since the uptrend trend line was violated only after price exited the PRZ, I would have decided to stay away no matter how nice it looks as that was not the ideal area of execution.

When it comes to the Type 2 Reversal, a few confirmation factors synced up to give me more confidence on taking this trade.

1. We have the Primary time frame confirming the structural pattern and that it was valid as RSI rolled out of the overbought region.

2. A clear uptrend trend line violation was seen clearly on the Proximate time frame which indicated that there was a valid reversal at hand.

3. RSI was showing weakness and it was respecting a downtrend line seen in the attached chart.

As it turns out, price action took a dive of approximately 80 pips after the Type 2 Reversal which turned out to be a pretty good trade as seen in the chart attached.

24 Nov 11 - AUD/JPY - M15 - Bearish Butterfly Pattern/ Type 1 Reversal

After taking a bit of a heat from yesterday's 2 trades, I spent some time reviewing my trading techniques and my understanding of the approach which brought up some realization. I was identifying patterns accurately but my triggers were always not so good and that they were in some cases not so ideal where I triggered trades after the price exit from the PRZ. All these voice down to my understanding of the RSI conditions and the timing of the my trades. In essence, this again changes the way I trade again as I get closer to the understanding the approach even more.

With the new insights to my trading, I attempted another trade today. It was a nice trade where there was more confidence in the trade trigger except for the fact that the trade yielded only 0.5 pips in profit. Then again, with proper trade management in place, I will have to look forward to another opportunity. The key in this case is to be consistent with the trade execution and trade management.

I would consider this a borderline case where I would trade this pattern as it completed. Since the pattern completed slightly above the stop loss limit area, there was a call for a bit of discretion here. With the RSI signals supportive of the trade, I went in to short this pair lightly and conservatively.

Distal (H1)

There was nothing seen in the RSI structure for the Distal time frame except for the fact that the pair was trending down and that it was retracing back to test the upper limits of the falling channel. This sets us up for a trade in the direction of the predominant trend.

Primary (M15)

This is the part where there was a little bit of discretion needed. Firstly, the Terminal Price Bar exhibited some extreme price behaviour, but after it's establishment we start to see some price stabilization where the high of the Terminal Price Bar acted as a resistance for the following bars. In addition, there was an impulsive RSI formation which exited from the overbought area which gave us a total of 3 confirmation signals.

The confirmation signals are:

1.Price stabilization following the establishment of the Terminal Price Bar.
2. High of Terminal Price Bar acted as resistance
3. RSI overbought test.

With the above in mind, I was looking to trigger the trade at the region of 75.300 to 75.330.

Proximate (M5)

With the entry price in mind,  zooming into the Proximate time frame serves to confirm what the Primary is telling us. In here, we are also looking for more confirmation signals to confirm a trade execution.

For the trigger for this trade, I went in a little earlier when I saw price broke the accelerated predominant trend line. Following this violation of the trend line, there was another confirmation which confirmed the reversal when a divergence occurred.

There was not doubt that the trade did suffer a slight bit of heat before reversing and this is characteristic of price action as price moves in waves and we will just have to let the price action assert itself. What is most important is that when the trade is triggered, we know that it was triggered with a myriad of technical conditions which confirmed the entry.

This actually exemplifies why we look for RSI conditions to be fulfilled as after an extreme test of the overbought or oversold area, price will usually have some correction. Therefore, with the use of the RSI coupled with the Harmonic Patterns, it allows us to have a high probability trade as we are expecting price to react in these areas before continuing or that they will reverse altogether.

The idea of looking at all these signals seemed a little tough to me initially but after going through some past examples, it will actually come naturally and as Scott was emphasizing, these confirmation signals will give us a higher probability trade and thus it is important to look out for them.This is totally different from my initial understanding that I will have to look for specific price pattern or candlestick pattern to trigger and thus this was a mind blowing experience. In essence, I was looking for a zone to assert itself and with the confirmation factors seen, I will trigger at the predetermined price at or just beyond the PRZ.

21 Nov 11 - GBP/JPY - M15 - Bullish Butterfly Pattern

This is one of those trades where the following could have contributed to the failed trade:

1. Trade entry was past the 1.618 time projection.

2. No clear RSI validation and confirmation were seen on the Primary and Proximate time frames. (Could have been the main reason for the trade failure.

Distal (H1)

As seen in the chart attached, I would consider this trade a counter trend trade where the predominant trend was that of a down trend. However, I zoomed out more and saw that there was a support seen at 0.618 Fibonacci Retracement level from the longer term up trend.

Primary (M15)

The only probable mistake here was have been the oversight that the Terminal Price Bar had a tail close and that there was not prior RSI extreme area test. There was an earlier RSI extreme test but that is considered to be too far away to be valid. As mentioned earlier, the main reason that this trade did not turn out well was that the RSI has not had any extreme test which lower the probability of the trade working out.

As seen in the attached chart, since there was not extreme oversold test and exit, there was no way that we could be sure that the market has reached a possible bottom. Therefore, this exemplifies the importance of the RSI as a confirmation factor.

Proximate (M5)

The same mistake was committed here as it was in the primary time frame assessment.

Trade Details

Date & Time: 21 Nov 11, GMT 08:20
Entry Price: 120.832
S/L: 120.620

Trade Update

The S/L was triggered on 21 Nov 11, GMT 08:41 at 120.618 resulting in a loss of 21.4 pips.

Reflection

After this trade, it confirmed that the RSI was a very important element in the assessment of the validity of a trade signal. Therefore, for future trades, I would prefer that the RSI has completed the extreme test before even considering a trade.

18 Nov 11 - EUR/USD - M15 - Bearish Crab Pattern (morphed from previous Bearish Gartley @ 0.886)

This is an interesting observation where I saw a Bearish Gartley actually morphing into a Bearish Crab. There will be occasions like this which will give us another opportunity to go into the market even when we have missed the earlier setup.

I have personally missed this trade as I was out on Friday evening but nonetheless, I thought it would have been great to take note of this observation for my future review.

Distal (H1)

For this trade, it would have been a trade of a higher probability setup since the distal time frame presented a resistance at 0.50 Fibonacci Retracement level at the 1.36074 region.

Primary (M15)

The reason for posting this example is cos this is truly a textbook setup where we observed a nice pattern completion followed by an overspill which is characteristic of Crab patterns which was synced with a RSI complex structure completion.

Proximate (M5)

For this pattern's entry, it was truly a very straight forward entry which gave us a low risk,high probability trade.

In the case of this trade example, there were various confirmation factors which added to it's success and this is one lesson which I failed to practise in the next GBP/JPY trade.

18 Nov 11 - EUR/USD - M15 - Bearish Gartley @ 0.886

This is a very short trade done to capitalise on the pattern's completion. Despite small profits, the trade was still considered a great one.

Distal (H1)

Following a fall, the pair was consolidating and the pattern happened to complete near the resistance (chart was captured later and a more interesting observation was seen after this trade when the pattern actually morphed into a Bearish Crab pattern)

Primary (M15)

A nice pattern validation and completion seen on the primary time frame which prompted a short.

Proximate (M5)

A short was triggered when the RSI rolled out from the extreme overbought area which in this case was a little not so ideal as the entry was after price exited from the PRZ.

Trade Details

Date & Time: 18 Nov 11, GMT 08:00
Entry Price: 1.35150

Trade Update

The 1st batch was closed on 18 Nov 11, GMT 08:20 gaining a profit of 17.8 pips while the 2nd batch was closed when the protective stop was triggered on 18 Nov 11, GMT 08:51 gaining a profit of 5.6 pips.

16 Nov 11 - USD/CHF - M15 - Bearish Alternate Bat

A nice harmonic pattern at play for this trade except for the fact that this was a counter trend trade where we can only expect not much from it and a more conservative approach has been employed in this trade.

Distal (H1)

As seen in the Distal time frame, this pair has been trending up. The signs of a possible reversal was that despite that the pair was making new higher highs and higher lows, the RSI has previously tested the extreme overbought area and rolled out from the extreme area when the pattern completed. This indicated an internal weakening in this pair.

Primary (M15)

With the RSI always being an early indicator, there was an extreme overbought test prior to the pattern's completion. Following the extreme test, the pattern was completed when the price tested the entire PRZ which validated the pattern in the presence of a divergence where the RSI was rolling down while price was still making a new high. This is one of the ideal cases where we know that the probability of a reversal is high.

Proximate (M5)

For the entry of this trade, this is a very direct and clear entry where there was a dark cloud cover occurring concurrently with the RSI exiting from the overbought area. Thus when we sync this up with the primary time frame telling us that this pair's RSI was trending down and that the proximate time frame has exited from the extreme overbought area, we have a high probability trade at hand.

Trade Details

Date & Time: 15 Nov 11, GMT 16:40
Entry Price: 0.91896
S/L: 0.92150 (25.4 pips)
T/P: 0.90750 (114.6 pips)

Trade Update

The trade was set to break even when price moved out from the PRZ.

The first batch was closed 0.91557 on 15 Nov 11, GMT 17:27 gaining a profit of 33.9 pips.

The second batch was closed when the protective stop was triggered on 15 Nov 11, GMT 23:52 gaining a profit of 14.6 pips.