12 Jan 12 - EUR/USD - M15 - Bearish Bat Pattern Type 1 and 2 Reversals

In the case of this example, it will highlight the importance of keeping to strict trade execution rules whereby no trades will be taken when there are no proper entry setups even in the event of a valid pattern completion.

It exemplifies the importance of discipline and patience coupled with the willingness to walk away from trades which do not offer us the ideal entries and thus serves as a reminder that not all pattern completions will be executed.

This is a great example as 2 important points will be highlighted:

1. The importance of abiding to strict trade management rules.
2. The importance of waiting for the exact technical setups to present themselves before even considering a trade execution.

Distal (H1) - Type 1 Reversal

In the case of the Distal timeframe, there was nothing much for a trade confirmation except for the fact that the pair was trending down. Although the price action has broken above the falling channel, the key technical even which I was considering in this case was the completion of the Bearish Bat Pattern completion as certain breakouts are simply shake out moves which will take some shorts out of the market.

Primary (M15) - Type 1 Reversal

In the attached chart, there was an extreme overbought test of the RSI preceding the completion of the pattern, which in my case would be an ideal case as such conditions will usually signal an exact reversal after the test of the entire PRZ with very little room for an overspill move.

In the case of the Primary Timeframe, there were 3 technical events here which validated the pattern's completion:

A primary confirmation whereby the pattern completed at the exact predetermined PRZ.
There was a clear price stabilization seen following the pattern completion where there was price rejection above the 0.886 XA level.
A RSI secondary confirmation preceding the pattern's completion.

Proximate (M5) - Type 1 Reversal

In the case of the Proximate Timeframe, although there was an impulsive RSI structure completion after the completion of the trade, the rising trendline violation only occurred after the price action rolled out from the PRZ. In such situations, this would not warrant a trade execution as I was unable to trigger at the ideal price which was predetermined by the pattern. The market will present another opportunity for us so long as we give ourselves a chance and thus it is imperative that we stick to the strict trade execution rules.

This wraps up the analysis for the Type 1 Reversal aspect of the pattern and what is more interesting is in the development of the Type 2 Reversal

Distal (H1) -Type 2 Reversal

When it comes to the Type 2 Reversal, after the natural reactive move from the Type 1 Reversal, the price action went back to retest the PRZ and drove the RSI into the overbought region.

At this instance, there was still no confirmation from the Distal Timeframe.

Primary (M15) - Type 2 Reversal

As seen in the attached chart, the price action seen on the Type 2 Reversal on the candle which tested the PRZ on a secondary retest was that of an extreme price expansion which was an initial warning that there would be a possible invalidation of the Type 2 Reversal.

In addition, at the secondary retest of the PRZ, the RSI was only entering the overbought region which was indicating an overspill to the upside.

Following the retest of the PRZ, the price action of the following candle showed a decisive continuation which prompted me to hold and observe. However, it was at the following bar which the PRZ was violated which invalidated the trade.

Proximate (M5) - Type 2 Reversal

When I zoomed into the Proximate Timeframe, it gave a very clear indication that the Type 2 Reversal would not have worked out for the following reasons:

There was no RSI validation on the secondary retest of the RSI at the Type 2 Reversal ideal completion point.
Despite a nice bearish engulfing pattern seen after the PRZ was tested, the lack of a RSI validation revealed a lot of the following price action which indicated that price might move further up. When the RSI tested and rolled out for the overbought region, the Type 2 Reversal was already invalidated as the price has since closed above the PRZ and that was out of the ideal execution zone already.

This was the example which proved to me that having strict trade execution rules which focuses on specific technical conditions are key to successful and I should demand a very clear setup before even considering a trade.

This is easier said than done and it has taken me a long time to learn about this rule and it all goes down to patience and discipline. With patience and discipline, it will only allow me to pull the trigger on high probability trades which are of high quality setups and I think this is important.