261 Snap Correction Strategy

[AMAFX]

The “2.61 Snap Correction” strategy is born largely as a product of many years of trying to use fibs to catch the proverbial falling knife.

To nail reversal points with micro stops and massive targets. To get homerun trades. Legendary trades.

I think I made one or two of them as well. Sometimes I did catch the knife by the handle and it made me feel clever enough to keep trying to do this.

I got a lot more knives in the foot, though. I type this with 3 fingers.

I wanted enough fingers left to pick my nose, so I moved on from knife catching.

The thing is, if you use the right swings and the right fib levels certain fibs do present incredible opportunities for specific entries and exits.

It was always the lure of this that got me, they could be so damn good!

Why was I always losing, then?

I was doing things so damn bad!

The 2.61 fib extension level was an area I was doing particularly badly.

The problem was, it is an area that can offer tantalizingly good reversal trades, bounces from this area can offer some of the best trades, if you assess the best trades as being those with the smallest risk, the highest gain and the smoothest run (no major pullbacks) to maximize that gain.

There are times where a good 2.61 entry with a tight stop can see your profit running up many multiples of your risk each new candle. In short, big profits, quickly. Which was all I ever wanted and seems reasonable enough to me.

I did get extremely good entries, part of the problem was that things could on occasion work phenominally well but my two main problems where having a trade run 2 or more time risk into profit only to come back for breakeven or even full losses and spike outs. I just got spiked out so many times. It is easy to think of many times a single pip would have been the difference between a big loss and an incredible profit but I suppose overall it would not have worked long term.

This is a strategy aimed at catching fast reversal moves from a 2.61 fib exension level that is far more efficient in overcoming the above mentioned challenges.

I see there were many inherent flaws in what I was trying to do and although it would produce some excellent trades it was probably not viable overall due to the spike outs and the profits being given back.

[AMAFX]

This is a strategy designed to take advantage of quick “snap” corrections that can happen when price has become particularly overbought/sold after a strong trending move that has presented a couple shallow pull backs previously.

The strategy is systematic, the rules are the same for all trades.

The strategy is to define a promising level price may have a short term reversal from and then use price action confirmation.

Support and resistance will be determined by use of fibonacci extension.

The strategy is simple, with few rules and yields a 1:3 risk:reward on successful trades.

Drawing of Fibonacci Levels

There are various ways that these levels can be drawn. A benefit of this strategy I have noticed is it is hard to get it wrong. It is easy to draw the levels wrong in a way that would be unprofitable but the implementation of the three basic rules act as a very hard filter. Even drawing them completely at random I found them to either just give no signals at all, or, if valid signals area produces, having an equal chance of profitability.

To give one solid and high probability way of doing it. We will use the reversal swing that triggered the downswing (this works both bull/bear but I have bear examples so will use bear terms throughout).

By “reversal swing” I mean we are drawing fibs from the low to the high of the last swing before the bears took control and the market plummeted. Establishing the high (where to end drawing the levels) is easy.

To establish where to start drawing the levels, look for the last ideal trade there would have been for a buyer. When price pulled back and then shot off into the final high. (Note, the larger the swing you use, the less losing trades it tends to produce, either through more winners or just filtering out more)

The set up is very obvious. There has been essentially a spike followed by a crash (relevant to recent price action and current timeframe).

This image should clarify things (and any day trader should know this scene, it is common enough).

There are three backbone rules that do a great job of filtering out losing trades.

There are then some subrules. Which are rules about the rules (how to implement them most effectively) and trade invalidation rules.

Of course, finally there are take profits and stop losses rules.

The three most important rules are;

1 - Price must show signs of respecting the 1.27, 1.61 and 2.20 fib levels.

This is critical. This is what filters out misdrawn fibs and does make it so that you can even draw at random and not generate disproportionate losing trades.

Price must show some sort of indication it “knew they levels were there”. It does not matter if they hold, retests, clustered closes, failed hammer patterns etc are all valid. We just need there to be good indication that these levels mattered in some way.

If these 3 levels of that drawn fib swing offered potentially support, it is rational to think the 4th may also, at least enough for our purposes of a snap profit.

2 - Price must trade under the 2.61 level and then have one full bar (including wick/shadow/tail … whatever you call it) close above the 2.61

Assuming you are drawing the fibs right, this is the rule that is going to save you from most losing trades.

It is important one full candle closes above, there can be no wicks under the 2.61, If there is a hammer candle, spiking under and closing above this is not yet valid. One full bar (bull or bear) must close above the 2.61.

3 - If these two conditions are made, set a pending order to buy a retest of the 2.61

The stop loss for this trade is under the low of the candle that traded under the 2.61,
The target is the 2.20. This should never yield under 1:2 RR and more commonly be 1:3 >

I will get more into the nuances of these rules to make them less vague where required of just to optimise but first let’s look at some chart examples.

[AMAFX]

New post required.

New users can add only one image to a post.

Lets look at one real chart example. One chart example is good**

We can look at more as we go on.

You can see that, when successful, the strategy lives up to it name, the whole trade usually taking between 2 - 7 bars.

This is the bare bones of the strategy, there are also some other filters that help to weed out losing signals that can be generated.

[AMAFX]

Active pending order on CHFJPY.

The different aspects of the trade are explained on the chart.

[AMAFX]

Target hit.