What are other high probability reversal trades besides the engulfing and pinbar

Eroica · November 14, 2012, 10:49am

Hi everyone

I was wondering If there are any other high probability reversal trades that are as reliable as the engulfing and pinbar trades.
Also, would these setups be reliable enough to trade as low as 1 hour time frame?

Thankyou for your help

2ndSkiesForex · November 14, 2012, 9:00pm

Hello Eroica,

I have actually quantitatively tested all kinds of price action reversal patterns, and they vary based on pair and time frame, but outside bars, or piercing patterns, along with exhaustion or climax bars can be highly profitable reversal patterns.

So hopefully that gives you some idea.

As to the 1hr, most tested poorly, unless you put on additional filters, so I would suggest staying away from them on the 1hr, until you learn how to isolate some key variables. Then you can trade them much more efficiently.

Hope this helps.

Kind Regards,
Chris Capre

mastergunner99 · November 14, 2012, 10:53pm

I wouldn’t just trade the pattern itself, but rather use that as an indication of possible reversals and see if there is any confluence with other tools use may use.

JohnLeonard · November 14, 2012, 11:44pm

The engulfing and pin bars, as well as the piercing pattern/dark cloud cover are probably the most easily recognizable and reliable reversal candles/patterns. As MasterGunner alluded to, context is everything. An engulfing bar, for example, has very little predictive value when taken in isolation. Recognizing an engulfing bar (or any other reversal signal) in the right location and under the right conditions, however, can be very effective.

2ndSkies mentioned the variances among time frames and pairs. I will not disagree but will say these patterns can be traded profitably on any time frames and with any pairs, including the one hour. Price is price is price. It is always moving. Charts isolate the movements visually and are fractal in nature. Supply and demand determines price movement so all pairs respond the same way to these forces. Chart representations are fractal in nature so reversal patterns on the five minute chart work the same way as they do on the one hour or the one week (with some minor variance as previously noted).

2ndSkiesForex · November 14, 2012, 11:55pm

Although I agree with many things John is saying here, and yes, you can trade these reversal patterns on a 5min similar to the way you do it on a 1hr, 4hr or daily, performance varies not in a minor way, but incredibly the lower the time frame you go.

I tested for example an engulfing bar system on every time frame from the 1m to weekly, and there were statistically many pairs that performed well on the system above the 1hr, but performed incredibly weak across almost every pair below this time compression. Too much for it to be statistically irrelevant.

In fact, I could only find two pairs out of 30 that actually had any success rate or profitability using the exact same system,
that made profits on a 5m chart, absolutely none below this, yet plenty on the 4hr or daily.

So I’ll have to disagree with you as the data simply does not support this.

An engulfing bar on a 1min chart could be meaningless, yet across 4hrs of price action represents half of an entire sessions order flow and transactions, so something different entirely.

As to the market and price movements determined by ‘supply and demand’ im also going to disagree as supply or demand is not really an issue per se in the spot fx market, as it functions more like an auction process. And fiat currencies can just be printed without concern by central bankers, so supply or demand is not quite appropriate or how intraday pricing really works.

Auction theory would be much more sufficient and accurate for describing pricing than actual ‘supply’ and ‘demand’ per se in the traditional economic sense.

But a good discussion nonetheless.

Kind Regards,
Chris

Eroica · November 15, 2012, 4:35am

Thank you for your responses, it is a great help

2ndSkiesForex · November 15, 2012, 9:55am

Hello Eroica,

Glad I could be of help in any way.

Kind Regards,
Chris

d-pip · November 15, 2012, 10:57am

Eroica,

Here’s a link to an old thread buried in the babypip achieves that presents a nice little multi candle pattern. I’ve found the v-formation works fairly well. And in line with what Chris mentioned, the signals on the longer time frames, 4 hour, daily and weekly, seem to have a much greater success rate than the 1 hour and lower.

The pictures in the original thread are pretty crappy, but hopefully clear enough to get the idea.

http://forums.babypips.com/free-forex-trading-systems/8595-trade-v-formation-system.html

JohnLeonard · November 15, 2012, 11:33am

2ndSkiesForex:

[I]In fact, I could only find two pairs out of 30 that actually had any success rate or profitability using the exact same system[/I]

[B]Consider that it may be the “system” that you are using to test results that is both pair and time frame specific, not the actual market reaction to isolated price patterns. If a small bar is followed by an engulfing bar it is almost meaningless, but not entirely. There must be something predictive about it. The “system” determines if this pattern is in the right location to increase the probability of an expected reaction. A pattern should be able to work across all pairs and time frames (with only some variance). An engulfing bar is an engulfing bar. It is identifiable across a range of time frames and the expected reaction should generally hold true, otherwise they are not tradeable patterns at all.

I agree with you completely that the smaller the time frame the less often an expected reaction will take place because, as you stated, there is less data contained in it, increasing the variance, but the reversal patterns themselves appear on all time frames.

I can post a chart, with no time frame given, and the various reversal patterns are identifiable. The expected results must repeatable, more often than not, otherwise there is nothing that is predictive about them. They are just bars on a chart, like every other bar. If the expected results only occur on specific pairs and specific time frames then it is not a repeatable and tradeable pattern, it could very well be chance. Finding that there is predictive value in them in only 2 out of 30 pairs is falling outside the zone of predictibility and well within the zone of coincidence. It is the system that incorporates these patterns that increases the probability of an expected reaction, in this case, a reversal, or, possibly in the case of your system, reduces that expected reaction. [/B]

[I]Auction theory would be much more sufficient and accurate for describing pricing than actual ‘supply’ and ‘demand’ per se in the traditional economic sense.[/I]

[B]I cannot argue this point. Using “supply and demand” has become something of a trading vernacular to describe the forces behind price movements even if auction market theory may be more appropriate. Still, the laws of supply and demand remain in effect, even in auction market theory.[/B]

Now I am just picking nits but what can I say, I am nit picker. I don’t think we actually disagree too much, just a few details (then again, the devil is in the details :53:).

purplepatchforex · November 15, 2012, 11:37am

Let me help a little here, take a step back, look at that from M’s point of view, it’s not so much the actual candle pattern, so much more influential is the resistance level, at the 2.0765 level you still have the possibility of support turning into resistance, but then the next high is lower giving you a safer entry and the main part of the move.

But d-pip, you didn’t have to go so far back for an example…

It just goes to show though, that tried and tested methods work time and time again.

Hopefully that’s a bit clearer