I am currently using a system which I am happy with but I would like to expand my skillset so that I can get more setups.
Here is the question:
Long time ago (2 years or so) when I was a very beginner I was backtesting a “system/pattern” where I have a trend on a given timeframe and then a pullback occurs, I would then be looking for a reversal pattern such as H&S to be printed such that it coincides with a diagonal level (trendline) or horizontal level (for example the last swing high/low). So I would enter on completion of the pattern and ride the “with trend” move.
Long story but I didn’t go ahead and use the system on a live account and eventually ended up using something else.
However I can recall I had outstanding backtesting results, the number of samples wasn’t huge but it was fairly significant. I won’t be able to provide exact figures as I no longer have the file with all the backtesting results. But results were clearly there.
Anyway, I am at the point where I want to expand my skills and this is something I want to go back to. A question I have been asking myself for days is:
If I want to trade reversal patterns such as H&S and double tops/bottoms WITH TREND is it important for the pattern to coincide with an existing S/R level such as last swing high/low/ trendline/Fibonacci. I mean, there is already a fair chance the reversal pattern will be occurring at an existing S/R level but that’s not always the case. Does this increase win rate significantly?
Does anyone trade these reversal patterns this way (i.e. so that they occur on transition from pullback to the next with trend move)?
Regardless of the answers I will be doing backtesting of course, but I would like to get some opinions first.
I trade a lot of reversals. To me, a trend is a trend no matter which way it is headed, what makes the difference is the major trend continuation or a short term pullback as a genuine reversal.
Yes, I take S&R into account the open white space is very important. The major trend has a chance of crossing the white space and a minor trend not so much. Many use fractals, pivots or Bolinger bands to gauge the profit potential. and an oscillator to get a handle on the timing and momentum.
Sorry, I am slightly confused with the wording (perhaps because it’s 2am where I am and I am about to go to sleep). Are you saying you trade this the same way I am looking to do it i.e. the pattern occurs on transition from pullback to the next with trend move?
Also I am not familiar with the “white space” terminology.
I mainly trade with the major trend but I look for the percentage of deviation from the mean, what many traders call overbought or oversold, when that occurs I’m in.
White space, what is the area in pips between S&R and the price point. By know that I can set targets with acceptable profit ratios. the exception is my lower time frame scalping.
What you’re describing sounds almost exactly like what I’ve been testing for the last few months. I’ve had the best results testing (not trading) head and shoulders reversals on the outside of consolidation on the longer time frames. More recently I’ve been looking for the same pattern as a continuation of the trend on smaller time frame on pullbacks. I haven’t used fibs but do look at S&R levels and trendlines for stop losses and take profits.
Great to see some more interest in the subject.
Which pattern other than H&S are you testing?
In terms of trading it as a continuation of the trend on pullbacks, do you look at S/R levels and trendlines for stops and targets only or does the pattern have to land at such level/exceed it slightly producing a false break? This is the main question that has been bothering me. Do you consider it important?
I was trying to google search for article on reversal patterns and how to trade them, but as you know everyone has their own idea. I did however come across one interesting article on double tops/bottoms. How to trade double tops and double bottoms for a living
I am not in any way associated with this website or person who wrote the article but I liked the fact he went into a lot of detail there. He also mentioned this in the article:
“The first criteria required for the setup to be valid is that the market reaches a significant support and resistance level with the first high. This criteria is essential when the market is trending and making higher highs and preferable but not necessarily critical otherwise.”
I have asked the author to clarify what he means here by email, hopefully will get a reply soon.
Important yes, but relevant to the time frame being traded.
for example on a 5M to 1H, simple PA, up or down no matter
1D I’ll add an HMA for the horizon view
Honestly, I haven’t collected enough stats to give you an educated answer on that. I’d like to have about 500 trades logged before I start spouting advice and even then, I’d hope you’d take it with a grain of salt.
With that being said, I have been looking exclusively at H&S patterns. They are abundant throughout all time frames. I trade the close of the candle that breaks the neckline.
I think I see what you’re getting at where the pattern has to land. I consider the close of the candle below the neckline to be a very powerful signal the pattern has confirmed. Consider the support and resistance more of a zone instead of an exact level and I think it may help you. Maybe zooming out a time frame or two would help illustrate this.
For take profit, I always shoot for the full extent of the move. I put a stop loss above the right shoulder (below for inverse H&S) but I draw a trend line from the head to the peak of the right shoulder and exit on the close of any candle that breaks above
this.
DISCLAIMER: Today was an awful day for me. The last eight trades I’ve logged have all been losers. I’m a newbie just like you guys.
Thanks for participating in this discussion guys, off to sleep now. One more question I have here. I am assuming you guys have no problems getting enough setups? Because I do. I recently tried to make a start with my backtesting these reversal patterns (which is currently on hold because I am currently backtesting a slightly modified version of my current system which is the priority now). And when I did I noticed I am getting not so many setups. Which instruments have more of these patterns? I might be looking for perfection to the patterns perhaps, but I am not sure if that’s an issue. I am just looking for a clean pattern, not overlapping with swings of the preceding move, not having an extra shoulder for example, etc. I mean having two left shoulders may not be such an issue for example, but I would think having two right shoulders would decrease probabilities significantly. I guess this is what pattern trading is all about, the pattern has to be to a good standard, not super-perfect but fairly clean…?
I will see your replies (if there are any) tomorrow.
This is a good (cherry picked) example of what I was saying about zones of support and resistance. It seems like EUR/USD has been bouncing back and forth between those two blue zones forever.
Kime, perspective is in the eye of the beholder and forex is no different. I am using a WK chart to Actuant my opinion.
The Zones, are extended your top and bottom zone to far, way past the breakout.
good for the long term and return to the mean center line or zone.
Hindsight is always 20/20.
What’s really important is what S&R level, what percentage of deviation is price action at?
In your Day chart, there are hundreds of pips bull and bear between your zones. Are you trading each leg/wave up and down, surfing?
Any way a currency pair is always moving back and forth between a zone established by the central banks. Often there is a bullish or bearish bias for long term trending if a trader has the funds to withstand the drawdowns.
Hold on a minute, Midwest. I didn’t trade this. I didn’t even notice it until after the fact. I have just been doing some testing on smaller time frames. This is hourly and those zones I drew were drawn on the daily for other purposes. I just happened to notice that hourly H&S jump up, through and test and finally reverse… It just reminded me of our conversation from earlier.
NP Kiwi! don’t get alarmed I was simply trying to answer your question.
BTW I’m still in this trade with a full lot to the south . Which may be a mistake given the the USD has dropped significantly, so I am waiting on a turn around before I hit my riak rules.
