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.