I have been trading this formation for a long time now and it is one of the best and most profitable strategies around. It offers some excellent risk/reward ratios. And with good money management it can be very profitable. It is all about price action and trading reversals. We dont use any moving averages. I have plotted stochastics just to help me see some momentum in the market. But i dont use the stochastics to enter a trade. The same goes for the fibs on my charts. It is there to help me get a better idea of the bigger picture.
Set up:I suggest you use this strategie on the 1 hr charts. It will give you 1-5 signals a day depending on market volatility. For a safer option you can use it on 4hr, daily and weekly charts too. Also remember that we never ever trade against the trend shown on weekly/daily charts.
Currency pairs:
Any
Sell trade:
We are looking for a candlestick in a uptrend to make a higher high. Once we identify this candle we are ready for the next step. Our next step is then to look for the first candle to make a lower high. Once we see a candle that makes a lower high then we know a reversal is about to occur. Our next step is to prepare for a sell trade on the candle that made a lower high is broken to the downside by the next candle to follow. If you look at the following charts then i will first show you the candle that made a higher high. Then a chart of a candle that made a lower high. And lastly a chart of how we enter the trade.
Buy trade:
We are looking for a candlestick in a downtrend to make a lower low. Once we identify this candle we are ready for the next step. Our next step is then to look for the first candle to make a higher low. Once we see a candle that makes a higher low then we know a reversal is about to occur. Our next step is to prepare for a buy trade on the candle that made a higher low is broken to the upside by the next candle to follow.
Short trade:
We wait for the low of the candle that made a lower high (see chart 2) to be broken to the downside. Once price has broken the low of that candle then we enter immediately. I have drawn a blue line to show where the enter short.
So basically we are looking for a v-formation.
There is one candle that makes a higher high
Then there is one candle that makes a lower high
Then we enter short when the candle number 3 breaks the low of candle number 2. That is our confirmation that a reversal is in progress.
For short trade i place my stop loss 10 pips above the candle that made higher high. The reason for this is once the candle that made higher high is broken then the trend is resuming.
For long trade i place my stop loss 10 pips under candle that made lower low. The reason for this is once the candle that made lower low is broken then the trend is resuming.
But you can play around with stop losses and use what is acceptable to you. As we all know placing stop losses is not an exact science but an art
[U]Profit Target:[/U]
Exit your trade once a new set up occurs.
When you are in long trade, you would exit your trade once you see a candle that makes a new low.
When you are in short trades you can exit once you see candle that makes new high
Ok so let’s look at a trade that is in the making. Currently we have a candle that made a lower low. Then we are looking at a candle that hasnt made a lower low. So this candle needs to be paid attention to. In about 10 minute when the 1hr candle closes i will know wether or not we have a set up
ok so the candle has just close and it has made a higher low. So now all we wait for is for price to break above the high of this candle and then we go long
yes the only problem I can see is that you are essentially retracement trading. As demonstrated this can be very profitable if you know what you are doing. You might perhaps look for a move that is a retrace so that when you get in on the turn you are in line with the dominant trend. Essentially this is using a 1 bar reversal as your entry signal. As always its good for people to have food for thought so thanks for posting. Incorporating ideas for profit taking would be useful
Good stuff. I’ve been trading this kind of pattern with some success recently, as an addition/alternative to the IB/OB trigger, but I’ve only been using it on 15min charts and only when stochs are mirroring the triangular formation of the three bars (and only at pre-identified areas of support and resistance).
Doesn’t work all the time, but what does. And I take Tony’s point about maybe applying it to a retrace. However, it certainly seems to to complement James’ IB/OB approach and can often mark the beginning of a strong move.
It is regarded as a strong probability pattern but, like all other patterns, it has a failure rate.
Again, Bolinger bands can be put to good use here to increase the chances of the pattern following thro. A Keltner channel could also be put to good use.
Using a stochastic or other such indicator which gives results on the close seems pointless to me. If you are going to enter while the 3rd candle is in the making then the results of your indicator have not yet come thro.
I personally would never enter while the candle is still under construction. Better to wait for confirmation, which is what the above candlestick pattern requires.
If you do not wait, there is a distinct probability that the candle could change colour and go in the opposite direction.
A 10 pip stop loss for a 1 hour timeframe ??? :mad: :mad:
:mad: