Why is it that not all patterns are created equally?
One of the reasons have to do with the underlying framework behind the formation of patterns. Let’s take a bearish pin bar for example.
In a bearish pin bar, traders are rejecting high prices as other traders who were long were taking profits and the rest place sell orders. In some instances the traders who participated in rejecting high prices were certain and convinced that price was sufficiently high so that it was the right time to sell the asset, therefore the appearance of the bearish pin bar that resulted in a big sell off and taking the trade would have resulted in profits. But in other circumstances a different set of traders would be involved and it might be for a different asset coupled with the fact that traders placing sell orders at the resistance level did not have sufficient control of the market. So, although a pin bar formed, placing a short trade would have taken price downwards but it would have met a strong fight from the bulls therefore initiating a opposite upward price movement that causes the stop loss to be hit resulting in a lost trade.
Therefore all pin bars are not created equal. Take the story of price action into context when making buy or sell decisions. That is why it is always emphasized that you should make sure the price action signal is large and obvious.
Sometimes, pin bars can be confused with japanese candlestick terminology. Yes, every noob goes through that stage. But taking note of this little secret can help you.
- Bearish pin bars occur at swing highs.
- Bullish pin bars occur at swing lows.
See the chart image below for an example of a bearish pin bar that should not be traded.
Pin bars have some similarities and differences to Japanese candlestick patterns terminology. Bearish pin bars are also called shooting stars in Japanese candlestick patterns and bullish pin bars are called hammers.
Two confusing patterns that you should note are inverse hammers that occur at swing lows. They are not pin bars. Also, hanging man patterns that occur at swing highs. They are not pin bars. These two should not be traded.
Loss. CHFJPY. H6.
Reason for Trade Entry: Price has approached a key resistance level on the H6 chart and it is a flip resistance level that was formerly support. The signal is a 2 bar reversal. The trend in the short term is a downtrend and if I take the trade, that is, go short, it will be in the direction of the trend. The bears have momentum on their side and they seem to be in control of the price action at this moment. I envisage some traffic around the 110.784 area so I will make this my TP1 and take partial profits when price approaches this area. My TP2 will be at the next support which is 110.482. The price action signal is large and obvious, showing that it has obvious momentum. Sell stop placed.
Trade management: At lot of bullish pressure on the price after the pending order was triggered. Decided to take a wait and see attitude while being flexible in my expectation. Throughout the movement of price, there were lots of bullish pressures. Today, 20/4/2020, price has started moving upwards, towards the stop. Decided to close it rather than lose 30 more pips.
Trade Result Remarks: Decided to close the trade because the large bullish momentum seems to be continuing into the London session. Decided that this was a losing trade.
Did you notice that I have had three losing trades in a row? I’m sure you have. But am I afraid of putting on the next trade because I might lose my money? Not at all. In fact, I am constantly going through the charts of those trades to find out what went wrong.
I am doing this because I have to work on my beliefs about the strategy I am using and the markets I am trading. Whenever we face the trading terminal and look at the charts, we see information and opportunities but the way we interpret those information and opportunities depends on our beliefs system.
If you believe that you will get hurt by what information you see, definitely you will. If you believe that the information from the charts represent opportunities, then you will have a positive state of mind.
But how can one have a positive state of mind and interpret the information from the markets as opportunities rather than a source of pain even while they have been having losing trades? The answer lies in what you believe about the markets.
If you think you know what the markets will do, then each time you lose, it becomes a painful experience and each time you win, you become overconfident. Never think you can predict the markets. The market is made up of traders who will do whatever they want to do and you cannot control that. Rather than predict or control the markets, try to control yourself.
You can control yourself by trading according to a trading plan and never deviating from the plan. Making sure you manage your risk and money. Finally, avoid putting your emotions into your trading. Using these steps, you’ll find joy and not pain while trading.
Yesterday, I posted a lost trade on CHFJPY. Then, because I felt it was closed prematurely, I created an alert on tradingview if price would go towards my TP1. Yes, price went towards TP1 and hit it. What a disappointment. I would have made profits from that trade rather than loss if I had not been overcome by fear that price would hit the stop loss. Now I have learned some noob lessons.
The chart below serves as illustration.
Two rules for buying and selling in trends:
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In uptrends, buy at swing lows. These are demand zones and you are buying in line with the trend.
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In downtrends, sell at swing highs. These are supply zones and you are buying in line with the trend.
The two rules above give high probability setups. Anything different is going counter trend.
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When you read up trading literature you are continuously given the advice that to grow as a trader you need to anticipate and accept losses. Yes, that is a skill in this trading game. But some traders cut short their development by trading not to lose. Trading not to lose is like living to avoid death. You know that both are inevitable so concentrating on avoiding this two in your daily living will make you a spiritual hypochondriac. You will not grow if you concentrate all your energy on not losing and you will lose not only the opportunities the market offers but your edge. Don’t concentrate on the negative. You can take care of losses by having good position sizing and cutting your losses short.
Have a nice day.
Loss. Gold. H8. Short.
Reason for Trade Entry: The signal, a 2 bar reversal, is at a swing high which is confluent with a resistance that was significant in the past. The trend is a downtrend and if I take the trade, it will be in the direction of the trend. The bears show strength and momentum in the trend, but there is a possibility that the bulls have some pressure due to the lower wicks on the bears. Therefore, have to look out for the price reversing briefly. There is no traffic in the direction of the trade and the price action signal is medium size. I have placed a pending order for a short trade.
Trade management: An insider bar has formed. An inside bar is a reversal signal. Price has moved to resistance back again. It is only 6 pips from hitting my SL. Well, I think the trade is over but will wait for it to hit SL.
Trade Result Remarks: Price hit stop loss for another loss. One thing learned is that I should never trade small price action signals. Never. I should control my greed to make instant profits. I should also trust my hunches. I knew there was a possibility that the bull pressure from the lower wicks on bear bars could revert the trend, but I ignored it. Lessons learned.
When we are choosing romantic partners, we look for someone who will validate our beliefs and attitudes. If we are altruistic, we look for a partner we believe will also be like that.
Research has also shown that is how traders choose systems and money management strategies.
Have you noticed that greedy traders first gravitate towards scalping strategies while risk averse traders tend to favor swing and position trading? But when those choices are not in harmony with their psychology or reality, they begin to do adequate research to know what is best for them, or some discover what strategy and methods to use through trial and error. As for some traders, they end up being losing traders because they never get to have such discoveries.
To understand what to do, before you start the journey of trading, analyze yourself based on your objectives. As yourself questions such as: what do you want from trading? What would you do if you lost money? Are you risk averse or a risk taker? Would you depend on trading for your daily income and is this a realistic expectation? Questions like this helps you to find out what trading methods you should choose that would fit your personality rather than allowing greed or fear to do the choosing for you.
While interacting on the forums, a trader told me that he was bored. There didn’t seem to be any trading opportunities to take. I told him that was a bad sign. Although there are opportunities aplenty in the market every second, but for each trader those opportunities are a factor of your beliefs and interpretation of market data. We interpret market information based on our knowledge and experience, and also decide to take a trade based on our system. If your system says that there are no trading opportunities for buy or sell today, respect the system and go do something else. If you are afraid of being bored and decide to tweak the system in order to take trades, you are doing random trading and that will result in compounding the boredom and your losses.
When bored, go watch Netflix. Or take your woman out for dinner. Never trade while bored. You will be taking random trades or overtrading.
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Two lessons I learned this week.
Hi, it’s been a learning process so far. I just wanted to add two points I learned this week from the trades I took.
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Whenever one is in front of the terminal, he is faced with two emotional responses. Either greed or fear. For one of the trades this week, greed was at play. Greed made me to trade a small price action setup. Now, I always tell myself – never trade small price action setups. Beat the greed and don’t allow the urge to just take a trade come over you. One way to beat the greed is to follow absolutely to the trading plan and the criteria for each trade. Now, I know better. Follow the plan and let the criteria be satisfied.
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Another lesson I have learned is to trust my hunches. If my hunches say that a trade might go wrong, I have to follow them and never take that trade. Yes, my hunches are a factor of my experience and this is important in trading. So, I will always follow them and not take a trade just because I want to trade. No, no, no. It is better to be out of a trade and be wishing you were in it, than to be in a trade and be wishing you were out of it.
When I started forex trading with a demo account some months ago, I was looking for the holy grail. When I tried out a strategy I found online and I lost money after ten trades, I decided it was not profitable and went back to try another one. I was in this fruitless search for two months until I gave up. The frustration was getting to my nerves. But my passion for trading did not go away. I knew that trading was profitable and I could make it. But I didn’t know how. So I went back to taking the babypips course a second time. That was when I stumbled on the trading psychology book by Mark Douglas titled: Trading in the Zone. That book helped me to realize a lot of things and one of them was that the failures I was having was not from those strategies but from me.
The book told me that to succeed as a trader I had to accept who I am. And who was I? A noob trader. I had to accept that fact. I had to realize that as a noob I need to train myself psychologically before concentrating on strategy. I needed to accept losses. I needed to tell myself I was not a failure because of the losses.
So, I began to work on my psychology. That was when I saw the need to start a trading journal so that I can record my thoughts and experience.
So, right now I do not think of the profits and losses in trading, or hop between strategies, but I concentrate on acquiring a trading experience. Trading is a skill and every skill depends on experience.
I have discovered that to improve in my trading I have to accept myself. My losses are a trading experience and my wins are also trading experience that makes me a better and improved trader.
I recommend that every trader should read that book. It will open up new vistas of knowledge about the trading journey and business.
Success. NZDJPY. H4. Long.
Reason for Trade Entry: This is the 123 pattern. Price currently at 3, the swing low, for the start of the uptrend. Point 3 is at the 50% retracement between 1 and 2, and there is a pin bar formed at 3 which is relatively large. So, I guess it is a good sign to enter. I entered at market. There does not seem to be any traffic in the direction of the trade.
Trade management: At the start of the week, 27/4/2020, the pair has showed a favorable bullish trend and with momentum. No sign of weakening. Price has approached a region of short term resistance on the H4 and formed a rejection sign. So, I thought price would significantly reverse here, so had to close the position for a little profit.
Trade Result Remarks: Closed the position on sign of reversal with a profit of $5.34.
Success. EURCAD. H8. Long.
Reason for Trade Entry: The market is in a range and is right on support which is a buy opportunity. There was also confluence because this region was a swing low, the combination of pin bar, swing low, and support makes a good confluence that gives a high probability of success. Going back in time, the level has been tested twice as support and it held. Once when there was a gap and another time before the start of ranging prices. From the action of the bears and the bulls, I notice that the bears seem to have lost their momentum in the close of the candle just before the pin bar. Also, there are little sell pressure wicks on the bear bars but more buy pressure wicks on the bull bars. So, I think a short term rally will ensue. Although there is some traffic if I go long, the traffic has been ignored in the past by another rally. The fact that the pin bar is significant and occurs at confluence makes me confident that this is a high probability trade.
Trade management: At the start of the week, 27/4/2020, price is at the region of the traffic mentioned above. Wondering if the bears will assert their strength at this region. Will wait until London open. The bears have started showing signs of coming at the region of traffic. So, I believe price will reverse. Decided to close.
Trade Result Remarks: closed when price came to a region of traffic. I think price will reverse here and closed manually.
Success. USDCHF. H4. Short.
Reason for Trade Entry: Before the pin bar appeared, the market was in an uptrend. The pin bar signifies a change in direction of price because it means that the market has rejected high price. If I take the trade, it will be a counter trend position. But the pin bar is huge and the resistance level on which the pin bar is protruding from has been tested twice in the past, so I believe that this region is significant and it can lower prices. The pin bar is at a swing high which means this is a good time to sell. I have checked the pin bar and it satisfies the criteria for valid pin bars. When I checked market control, although the bulls have been dictating the trend for a long time, I think that the sellers are coming in judging from the fact that the bull momentum is weakening and the upper wicks on the bars shows that sell pressure is evident. I think the bears will have their day in this occasion. Yes, the pin bar is large and the traffic in the direction I want to take the trade is minimal. So, I think it is a good entry.
Trade management: The position slept over the week. At the start of the week, 27/4/2020, the pair has shown a favorable bearish trend. A 2 bar continuation signal has appeared. Hopeful the favorable selloff will continue. Price has approached a region of traffic on the H4 which could potentially serve as support. Have to watch this. Because the traffic region could prove to be a temporary support and another upward trendline is also serving as support, I think a rally would be unfolding. So, I have decided to take partial profits by closing 0.03 lots of the 0.05 lots and then moving stop loss to break even. That means $9.80 profit has been taken from the table. Now, the positionis risk free. The stop loss was hit after a bullish candle made an upward high momentum move.
Trade Result Remarks: This trade taught me lots of lessons. Like never to panic when a trade seems to be going against you because you have rehearsed your exit strategy beforehand and you are trading risk free although the RR is reduced.
We do it all the time because trading is a business of passion. When we are down, we use it to get inspiration or to beat ourselves. When we are winning, we use it for motivation. What am I talking about? Self talk.
Self talk is the act or practice of talking to oneself, either aloud or silently. It is a reflection of our emotional state at that moment in time.
As traders, we want to be careful of our self talk. Many traders do not do themselves good by engaging in angry and frustrating self talk. It only makes them make errors in trading because it is a reflection of their mental state. When your state of mind is not right, you will not be focused and that is when trading errors creep in.
Our self talks should not be self focused. Remember, your trading result is not a reflection of who you really are. You are not a failure because you lost out in trading neither are you invincible because you have had some winning streaks. Our self talk should be based on our strategy. They should highlight what you’re doing well while practising the strategy and should serve as a motivational pad for improvement if there are areas of weakness while applying the chosen strategy.
When doing self talk, try to ask yourself: would I want others to talk this way to me while trading? Then talk to yourself in a way that you would be inspired and motivated.
Remember, trading is won in the psychological battle ground, therefore prepare yourself emotionally by giving yourself inspiring and motivating self talk.
Trading is a business. It is the business of making money from buying and selling currencies. So, you need to set goals and define your objectives for being a part of it. Trading like every business can creep into your private life. You might find yourself thinking extensively about your profits or losses even when markets are closed. If you do that often, do you get emotional about the thought process?
I found that it helps at market close to analyze the trades for the day in order to find out lessons learned. You should have seen some posts about trading lessons learned in this journal. Every trade, whether a loss or profit should be a lesson learned.
When analyzing lessons learned, find out what steps you will take to strengthen your weaknesses, and reinforce your strengths. By so doing, your trading will have quality control. Set milestones and evaluate them on a periodic basis.
One goal I set for myself is to reduce the mistakes I make while trading and only going for high probability trades no matter if there are temptations to do otherwise.
If you treat trading like a business, the money will take care of itself.
Risk control is something that should not be trifled with. It is more important than your entry setups. If you have proper risk control and the right mental attitude, you have won 90 percent of the trading battle.
Risk control includes but is not limited to your position sizing strategy, the amount of money you are willing to risk on a trade, and your exit strategy.
Do you analyze your trades on a frequent basis? You would discover that your profit and loss profile would change if you eliminate trades where you didn’t carry out proper risk control. That is why we should have and strictly follow any risk management parameter we have.
As retail traders, leverage makes it possible for us to trade large positions with little amount of money. With a leverage of 100:1, you could trade a position of $100,000 with just $1,000. But does that mean you should use up all your leverage, hoping to hit it big time with just a 10 pips move. 
The size of your positions should not reflect the opportunities you see in the market. Opportunities in the market are unlimited but your money is limited. Hence, you should first think about how much you can afford to lose in a trade before calculating what you hope to gain. Remember, profits are only floating until you close that position but losses are hard and real.
Some traders are in another boat. They fail to capitalize on the opportunities that exist in the market. Most times, this is because of fear - fear of losing because the last trade was a loss. Sometimes it could be because they were distracted and were not concentrating while analyzing the charts. Whatever be the case, their trading comes with a huge cost; the cost of profits lost and the cost of resources spent in front of the terminal which could be used in doing something more profitable. Try not to be in this group.
Then there are these other set of traders who will always blow their accounts. Traders who create opportunities when none exists. They are always tweaking their strategy, tweaking the trading plan, and trading by discretionary means. Yes, having gut feelings about a setup is common but you should not rely more on your gut feelings otherwise put the experience gained in your trading plan. Creating opportunities where none exists has made many traders to hop from strategy to strategy, from broker to broker, searching for the holy grail, and all they do is blow up their account time and time again.
Do you fall into any of these class of traders?
Loss. USDJPY. H4. Short.
I thought I had everything figured out for this trade until I broke one of my rules. Below are my journal entries before and after the trade.
Reason for Trade Entry: This is a downtrend and price is currently at a swing high. If I sell, I will be trading in the direction of the trend. The signal is confluent with a support level, although it is a minor support level, but this is also confluent with the 50% Fibonacci level. The signal is a 2 bar reversal pattern and it satisfies the criteria for 2 bar reversals. Just before the pattern, there was a volatility contraction with momentum decreasing as price did a retracement. Then, price tried to break out with a high volatility candle to the upside and it was a strong bullish candle although the candle showed some signs of sell pressure. I expected the breakout to the upside to continue but the last bar that was part of the pattern started from the close of the candle and rejecting high prices with momentum, it moved further down, even to the low of the breakout candle. So, this signifies a rejection of high prices with momentum and a pullback to the downtrend. The size of the bar patterns are very large, showing that the pullback is strong. There is no traffic in the direction of the trade until we get to the next support at 105.87, so I will make that zone my TP1. I have set a sell stop order.
Trade Management: Sell stop triggered. I allowed the trade to go on because I felt that the volatility breakout will be in my favor. The way I read the price action, I thought that the key area would be a resistance, but it turned out to be support.
Trade Result Remarks: A volatility breakout to the upside, with a huge engulfing bar, took out my stop and I was left hanging. Sad. One lesson that I learned is never to trade volatility breakouts when you think they will occur, especially inside bars. Very trickish game.
