19 Jun 12 - EUR/USD - M15 - Bearish Bat Pattern - Type 1 & Possible Type 2 Reversals

This is an interesting development on the M15 timeframe where it highlights the beauty of the Harmonic Trading Approach.

Although there was no trade done on this pair, I thought it would have been interesting to document it as there were many learning points in this example. In this example, the following learning points which I think are important are the following:

1. Despite a not so ideal completion of the pattern as it completed even before the 0.382 alternate time projection, the price action and RSI formation following the pattern's completion was that of a classic textbook example of a trade execution. (Something which I would like to thank Scott for pointing it out and it somehow stood out very clearly in front of my eyes, which is something I thought is important to document in my blog)
2. The trade management aspects of the trade and the expectations along with it.
3. A nice pattern within pattern which sets up a potential Type 2 Reversal signal.

These 3 points are something which I have struggled along with for a long time and I guess with perseverance, I have come to weather these challenges and thus they were shouting at me to take note of them.


Type 1 Reversal

M15 - Primary

Minus the fact of an early completion in the case of this Bearish Bat Pattern, there were many factors which would have created an ideal sell scenario.

Following the completion of the Bearish Bat Pattern, the first indication of a nice trade at hand was the price stabilization occurred after the establishment of the Terminal Price Bar. In addition to the price stabilization, the Complex RSI Structure rolled out of the overbought region and completed a RSI Confirmation signal which in this case was a nice setup to me though.

Note: In the case of the secondary test of the RSI, since it completed as a complex RSI structure, this is sort of a hint that the RSI would probably come back to test overbought region again as an impulsive structure later to resolve itself and thus serve as an early hint that there might be a possible Type 2 Reversal.

H1 - Distal

In the case of the Distal timeframe, there is basically nothing much in terms of the confirmation except for the fact that the RSI has come out from the overbought region.

M5 - Proximate

** In this timeframe, I am highlighting the key points of trade execution as there were many factors in this setup that would point to a very nice trade execution except for this case is that it completed a tad too early.

As we look at the overall picture of the pattern, there was a nice RSI BAMM Confirmation in this setup which was considered to be a great signal for me.

In addition, the early signs of the reversal was gauged in this timeframe where is shooting star was observed following the Terminal Price Bar establishment followed by a Bearish Engulfing Pattern which was my signal for a possible reversal.

The trade could have been triggered at the point when Complex RSI structure exits from the overbought region. This would have been a nice place to trigger as it was near the upper limits of the PRZ, in this case the 0.886 XA leg.

As for the trade management aspect, since it was a Complex RSI structure which was seen at the trade execution, we can more or less expect that this is a brief reversal as the whole structure might later experience a secondary retest and resolve itself later as an Impulsive RSI structure and thus trade management in this case would be aggressive.

The trade would have been squared off when the price action violated the accelerated trendline and this natural reactive move would have been a profit of around 22 pips.

Thus, knowing how to react with the HT Approach, we will know when and how to capture the high probability segment of a trade and i think this is crucial in trading.


Type 2 Reversal (Possible)


M15 - Primary

As mentioned earlier, since RSI structure at the completion of the pattern was that of a Complex structure, we will be expecting that there will be a secondary retest of the pattern's PRZ which will set up a Type 2 Reversal. In most cases of a Type 2 Reversal, there will always be a smaller pattern transpiring which will set up another trade opportunity.

With the expectation in mind, I was more of looking to sell this pair on a Type 2 Reversal.

I will be updating again later if there is a setup coming along.


Update (20 Jun 12)

Type 2 Reversal

Following my earlier post, I was actually preparing to short this pair today while expecting for a Type 2 Reversal to materialize and true enough, a nice Type 2 Reversal presented a very nice opportunity to enter on a short in this case.

M15 - Primary

This is a very strong structural signal to me as the Type 2 Reversal in this original Bearish Bat Pattern was later complemented with a smaller Bearish Bat Pattern's PRZ and thus giving rise to a very harmonic resistance. I would call this a pattern within pattern.

The Type 2 Reversal in this case became a valid signal as it completed after the 0.886 alternate time projection which was within the window permitted for a reversal.

Despite an expectation of a RSI extreme test, there was none observed and thus it was regarded as a RSI confirmation from the earlier setup as seen in the chart attached below.

The only consolation in this case was that the RSI was clearly indicating an internal weakness in this pair as it assumed a downtrend and it has been moving down even before the reversal took place.


M5 - Proximate

This is where it gets a little technical and yet interesting on the Proximate timeframe as there were a few confirmation factors which took place here.

Firstly, as I zoom out to have a closer look on the whole pattern's formation, there was a nice RSI BAMM Confirmation which set me up for a nice short bias. In addition, since the whole RSI BAMM structure was completed, it has also given me an expectation that there will be a more extended reversal and thus more room will be given for this reversal.

In the case of the execution, the trade was later triggered on a Japanese Candlestick Pattern on a Dark Cloud Cover following the entire test of the smaller PRZ. It should be noted though that in this case, the RSI Impulsive structure completed before the pattern was completed and this was okay as RSI is usually early and thus I will have juggle this around. Added confidence was there as the RSI was also respecting a falling trendline.

The trade was triggered at 1.27154 which was near the upper limits of the smaller Bearish Bat Pattern's PRZ.

A nice playout ensued and the trade was set to breakeven prior to the FOMC Statement to put the trade in a risk free zone and thus reducing stress on my part.

IPO 1 was hit and the first batch of the trade was closed at 1.26623, gaining a profit of 53.1 pips.

As for the the second batch, the trade was later closed when the price action violated the 0.382 Trailer. The trade was closed at 1.26679, gaining a profit of 47.5 pips. (I closed the trade slightly earlier as I think my projection was a little bit off earlier when I was projecting the Fibs, but it was okay for me though.)

Reflections

I am truly grateful and glad that my understanding of the Harmonic Trading Approach is getting clearer as I remain focused on mastering it. Perseverance is one of the most important value here I guess as I have gone through many hard knocks before getting a better understanding of the Approach and I am glad that I have held on up till now. It is also thanks to Scott for his encouragement that I am finally seeing the light and thus a hope for a better future now that I am equipped with the BEST tool in trading.

The Approach has a solid basis once I started understanding the ebb and flow of how it works and patience is needed here if you are new to it. It will come to you and you will soon understand it so long as you give yourself a chance and focus really hard at mastering it. This is basically what I did and I am still doing now as it has been a desire of mine to master the approach.

Good trading everyone!