Higher low, lower high system

The original idea behind this thread, a good trader said to me that the first retracement is the best trade. The first higher low/lower high. These retracements provide good opportunities to enter into a move with a relatively small stop loss. A hl/lh confirms a test and failure to follow through at a certain level. You can use this on any time frame, we prefer to do our analysis from higher time frame charts and take entry from 15 min (mid-late 2012 change).

The 3 bar reversal indicator, what I have often called an engulfing close, was specifically written to help signal some of these reversals. It will alert with an arrow down when the signal candle has closed below the previous two candle closes (one of the two prior must be a positive close). It will alert with an arrow up when the signal candle has closed above the previous two candle closes (one of the two prior must be a negative close). The arrow is placed above/below the candle that follows the signal candle. If you look at the 1 2 3 examples below the 3 bar reversal indicator would signal at the close of the candle marked 2. Tip - if you don't like the arrows to show on the charts you are watching, just load onto another chart of the same time frame and minimise it. The sound alert will still pop up even if that chart is not the one you are watching.

Trades 1 and 3 are the turn trades, at key levels and price extremes (of the session). They are typically in and around the London open (head fake) and in resumption of trend pre/early US session. Look for pa to move counter trend, fake and turn in direction of major trend. Trade 2 is when a trend has been established. It is amazing though how many first retracements coincide with either the close of a good 1hr turn candle or happen soon after the close. See the charts below.

1)Higher lows and lower highs at extremes from 15 min (also known as 1 2 3 tops/bottoms) at a key level ie pivot, psych level ie 00, 25, 50, 75 or SR level. Whilst some entries will be at the point 3 we do look to enter on the X. We also watch double tops/double bottoms.

Below is the 123 reversal when the price fails to make a lower low or higher high

1. trend line broken (I don't use TL's)

2. lower high in an uptrend, or a higher low in a downtrend.

3. break below the previous low in an uptrend, or above the previous high in a downtrend

At point 3 the reversal is confirmed and everybody’s brother is getting in. A stop run often follows to re-test the penetration at point 3. Quicker traders may get short at the X.

Attached Imageshttp://cdn.forexfactory.com/attachment.php?attachmentid=501283& stc=1&d=1278063333

Attached Images

http://cdn.forexfactory.com/attachme...1&d=1278065829

2)What I'll call 100% system trades that will follow the 1hr with entry from 15 min higher lows and lower highs. Decent retraces 25-35 pips, to stall at pivot/psych levels with crosses of 8 lwma back to trend are good trades. So not all 8 lwma crosses are trades, look at trend.

3)A 2b reversal trade which is a variation of the 123 top/bottom and is also an indication of a test and failure. I use some indi's on charts ONLY TO SPOT DIVERGENCE for the 2b trades. In particular we avoid counter trend hl/lh's pre/early US session as these are often fake outs giving 2b entries back into days trend. Examples of pre/early US fake outs with 2b entry into trend http://www.forexfactory.com/showthre...51#post5313651 and http://www.forexfactory.com/showthre...38#post5286338

"In an uptrend, if prices penetrate the previous high but fail to carry through and immediately drop below the previous high, the trend is apt to reverse. The converse is true for downtrends." [Vic Sperandeo in "Trader Vic: Methods of a Wall Street Master"]

The 2B principle gets its power from the large number of stop-loss orders in the area of the X. Many traders who bought the breakout will have their stop-loss orders there, so if prices fall below the blue line those stops will be hit, driving prices back down with thrust. If you enter a short as the breakout traders are bailing out of their positions, the burst of selling can propel your trade into the green so quickly that, before you can enter your stop-loss order, prices have moved far enough in your favor to set your initial stop-loss at break even. The inverse is equally effective for 2B bottoms.

Another name for the 2B is "spring." Imagine the blue line in the graphic as a rubber band. The bigger the poke above the blue line, the stronger the reversal potential if the breakout fails. This same principle works on failed triangle breakouts and failed trendline breakouts. If you were unfortunate and bought the breakout, instead of putting just a stop loss at the X, consider making it a stop-and-reverse. This pattern occurs at the tops and bottoms of consolidations as well as at major reversals.

I was unable to copy the picture from the website, see the charts here http://www.forexfactory.com/showpost...postcount=2077

General

The London session, gu will regularly do 125 + pip ranges. Each time there is a stall and turn that extreme becomes the starting point potentially for the session move. This bigger move is more likely to happen after 9.30 gmt than before. Between 7 and 9 am gmt a decent range is around 50 pips, numbers show something like 70-80% of the time these are the London open head fake moves. Price moves a reasonable distance in a direction only to reverse for the days bigger move.

Some knowledge of candlestick analysis is required as you want to be trading the right candles. Theres only about 5 to watch for. If I had to give 1 simple rule of thumb it would be engulfing close (particularly engulfing the last 2 candle closes, see the reversal 3 bar alert attached). Consider key levels for turns (eg round numbers, D and W pivots, some fibs, S/R areas), follow the 1hr for trade 2, are we above below 1hr 8 lwma (see chart below should be obvious why) is the 1hr itself on a hl/lh as the higher high higher low or lower high lower low flow is crucial, 5/15 min hl/lh's. Once set up on 5/15 min price should move a pip or so beyond the high low of the set up candle to confirm the trade. The set up candle should have little/no wick in direction of trade eg if buying little/no upper wick.

Stops: Around 15 pips on 5 min, 25 pips on 15 min 2% of capital. Look at area of last swing high/low.

Exits: Up to you. We like to target partial exit at support/resistance levels, round numbers and W pivots. If entered during London open we also try to hold through the pre/early US counter trend head fake.

EXAMPLES

Is the daily trending (itself on a clear hl/lh) in need consider D candles, fozzy rsi cross, rsi above/below 50 level. Has 1hr confirmed with a good candle (on its own hl/lh) fozzy rsi cross above/below 50 rsi.

On 5/15 min are ma's correctly stacked (late 2011 add on for Mrs V easy visual). IF NOT then we would definitely want good 1hr candles to signal return to D trend. These 2 posts should show the differences in ma's http://www.forexfactory.com/showthre...69#post5192869 and http://www.forexfactory.com/search.p...archuser=35654

You can use the search tab in the blog for "weak pre/early US session" candles, "higher low (or lower high) after divergence", "engulfing close", "multi time frame analysis", "1hr flow", "counter trend items to consider" for some of the concepts I consider important.
http://vantagefx.blogspot.com/2012/0...d-candles.html

http://vantagefx.blogspot.com/2013/0...ivergence.html

http://vantagefx.blogspot.com/2012/0...ivergence.html

http://vantagefx.blogspot.com/2012/1...ulti-time.html

http://vantagefx.blogspot.com/2012/11/question.html

http://vantagefx.blogspot.com/2012/1...-consider.html

http://vantagefx.blogspot.com/2013/03/recap-28-mar.html

http://vantagefx.blogspot.com/2013/02/trade-rules.html

These are just examples of posts there are many others and trade examples on these topics.

1hr template attached, for 15 min set up change 50ema to 200ema.

The first post is looking to find the trend for the day. Once price has moved around 100 pips eurusd and gbpusd can easily have good counter trend trade bounces off round numbers and pivots.

This morning gbpusd fell 100 pips to the central pivot, bounced, had a higher low just above 1.8500. I look for higher lows/lower highs off 5 and 1 min charts.

Great price action trading.
What is M2/M4 ? and what are the numbers next to hammers and stars? 2,3,4? what is the difference?
So basicly if i understand you each hour you look only for one direction long or short based on the closing of previous hour (higher or lower close) not taking into consideration the direction of the trend in bigger TF (4 hr, daily)?

M2 M4 are just 2 of the pivots and show potential areas that price may hit during the course of the day. I don't place any reliance on this for looking at trades.

If the 1 hr set up candle just happens to be in the direction of the daily trend great, I'll adjust my profit expectations up accordingly. I don't avoid trades if the 1 hr candle is going against the daily trend. The 3 currencies I trade move enough to accomodate counter (to the daily) trend trades.

As long as the hourly closes are staying positive for buys, negative for sells I'll either stay in targeting the next pivot/round number for an exit, or re-enter on next higher low/lower high if I did take profits.

Of course a higher low/lower high on 5 min chart that goes against my trade is a signal to get out, as would a close on the other side off the 5 ema.

Sorry the hammer question. The pattern recognition just gives different numbers to hammers depending on size of body, upper/lower wicks, a HMR 2 or 4 has no bearing on trades.

thanks for your answers.
I still dont understand the criteria for entering a trade because basicly we can have a trade each hour like now(sorry i cant upload a chart)
the eur/usd closed higher on hourly and there was a 5 min candle that closed above the 5ema (on 11:30) , a long there 1.4771 would be stopped.
so what are the other filters? because i believe almost each hour we would a 5 min candle crossing the 5ema in the previous hourly direction. what do i miss here?

Hopefully this will help. These charts are current so the following would have been trades.

Eurusd had a spinning top on 1hr 3 candles back so thats a good indication that the run up has stalled and an opportunity to look to sell.

The first lower high was on the 5 min chart 5 past the hour at 11,05 and a 2nd opportunity to sell was highlighted.

So whilst I'm not looking at every hourly candle to enter a new trade once in you'd be looking to trade each lower high/higher low until the run has ended. I would be looking at 1 hr candles that show a position contrary to the direction I am in.

Your first clue that the run has ended will usually be a higher low/lower high against the direction of the trade you are in from the 5 min chart.

I wouldn't have been looking to buy at 11.30. The 10 am candle was a spinning top and there was a first lower high at 11.05. The cycle for up was therefore most likely broken and the only thing I would be looking for was a sell.

The filters are
(1) what has the hourly candle done,
(2) the lower high/higher low on 5 min
(3) and a this is a little vague but getting a feel for this kind of trading especially around pivots/round numbers especially where 100 pip runs have already taken place i.e. you could look for counter trend trades off 5 min only without waiting for a 1 hr candle close.

ok, thx for your answer. basicly i should look for entries after 1h candles that form reversal patterns and not just LH/HL for better trades from what i understand.
about the trade - i believe the entry is at the opening of the next candle so entry at 11:10 candle, it moved our direction but went back to become a losing trade at one point, so my question when do you move sl to BE if any and what was your exit point in the first entry?

Look for 1 hr reversal candles but also higher closes for buys and lower closes for sells. The amount of 1 hr higher closes on 22nd Sep is a classic example. The starting trade came from the hammer as mentioned in my first post but there were many higher lows after that.

Yes the entry would have been a sell at 11.10. I hate to see even 20 pips go back to BE or a loss. As this is essentially a scalping system that can get great entries into the days biggest moves I'll look to take profits from 20 pips on depending on where pivots, round numbers are. A big but here is but I know I'll be prepared to take every lower high/higher low that follows.

I'm a big believer in "you don't go broke putting profits in the bank". So that trade from 11.10 I would most likely have gone out at 1.4750 knowing that I'd be quite happy to get in again at the next lower high.

take a look at the next set up plz.
the 12:00 hourly candle was bearish forming a LH so we should look for shorts in next hour.
The next hour was all bullish but the 13:55 formed a LH and crossed the 5ema down. that was a big profit short but should we take it after such a bullish hourly candle?

Sorry for the delay I've normally finished for the day by now and was away from the computer.

Yes the 12:00 candle was still negative and so yes we would still be looking for shorts, but this was a move started from the 10:00 candle. It gave 3 entries at 11:10, 11.55 and 13:00. If I had taken the last trade at 13:00 I would not have let it go from 20 odd pips up to a losing trade firstly. As each subsequent LH, HL happens in a move the less likely it will carry on working and the more likely I'll look to take profits at any pivot, round number.

Not something I've really mentioned but have a look at 1 min chart same ema at 13:20 being the 1st retracement up. Anyway I don't want to mention the 1 min too much yet.

The next hour 13:00 was bullish so in terms of the system it wouldn't have been a sell at 13.55 (well spotted). HL's and LH's off 5 min work really well and in time to come you may personally decide to trade all HL's and LH's. The system as it is presented just gives low risk entries by trading in direction of 1 hr candle.

is it possible to change the point fingered to maybe arrow ??
thanks ..

i like the Pattern Recognizer ..

vantage, it will be great if you could post more examples.
take a look at this trade. bullish hourly and HL crossing the 5ema on 5min.
something wrong with his trade or a valid signal that got stopped?

One of those do you don't you this morning.

The 4 am hourly candle was a positive close and there was a (not shown) higher low when the 6.05 5 min close. This was just a touch too early for me this am.

The 5 am had another higher positive close so the bias is buy. The 6.30 5 min candle closed just below the 5 ema. Flip a coin time do you , don't you. If you're going to take a chance I'd much rather take a chance going in the direction of the trend. For me the 1 min chart helped make a decision to buy.

Hi HUnter 123
First of all there was an opportunity earlier on eurusd, again this was just a little too early for me (its a public holiday here and I was a little lazy this am).

The double bottom at 6.05 am, yes the previous hourly candle was negative but the pound and euro love to turn around at these times. A double bottom with a rejection at the pivot and half number with a nice higher low on the 1 min at 6.14. The pound also had a very similar rejection of even number and pivot just above.

As to the trade you mentioned, yes it was a valid higher low. My wife and I were discussing long and hard that we did not like the 1 mins 2 lower lows just before this trade. Despite the fact that that we both did not like the 1 min chart we did indeed take this buy but got out at -10 instead of -15 stop.

One of those things a good EJ trade and a small losing trade. Also as happens the losing EU trade kept us out of the LH that immediately followed. Yes like you mentioned in an earlier post we do look to take most LH and HL trades despite the 1 hr candle.

HUnter 123 forgot to mention the small losing trades that obviously do happen are heavily outweighed by the good entries that this system gives for the long runs that these currencies have most of the time.

Cheers.

yes, i saw the support of 1.8500 in pound but i didnt take it because of the bearish candle before. it's a bit confusing now that you sometimes ignore the hourly candle. the trade i posted in eur/usd i didnt take because the 5min candle was not so bullish , it turned to be a doji like you saw in 1min chart, it "smelled" like a reversal so i avoided it.

Yes it can be a little confusing there is the standard trade which follows the hourly candle and the 2nd option which looks to trade bounces off pivots and round/half numbers.

If this is in any way unclear pick the one you like the most and run with that for a while. Of course its probably best to do your normal trades and paper/demo this for a while.

I haven't really mentioned news events as yet. I'll trade HL's LH's up to 30 mins or so before most Euro, UK news events but will look to tighten stops or exit very quickly. I do tend to stay away much earlier from their interest rate statements or when their central bankers are giving press statements.

I stay clear of most US news events from much earlier on and only look to trade this system on days when there is no US red news scheduled. Red US news events tend to be too choppy for me.

I do trade Euro, UK news events (apart from interest rates) on a different method.