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 1hr and 15 min (mid 2013 changed from 15 min which was a mid-late 2012 change from 5 min). The things that we do and assess have improved over the years as our skills have improved. Interestingly the absolute basic of the thread - the first trade is the best trade - remains the same.
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. Please note there are no filters on the 3 bar reversal so you have to do your assessment. Are you getting a counter trend signal at a support/resistance level, if not are you clear on why you would consider a CT trade? Are you getting solid trend signals at Asian open, in and around London open and in and around US open.
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 (attached images) charts below.
1)Higher lows and lower highs at extremes (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.
2)What I'll call 100% system trades that will follow the 1hr higher lows and lower highs. Candles that cross the 8 lwma back to trend are good trades. So not all 8 lwma crosses are trades, look at trend. Our basic trend definition is D RSI 50 level, buy above and sell below. Within that D trend the 1hr can be going against this, that is the 1hr can be trending down against the D that is above RSI 50 level. We would be looking for 1hr flow in line with D 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
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. Once set up on 1hr price should move a pip or so (+ spread on buys) 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: Look at area of last swing high/low.
Exits: Up to you. From the mid 2013 tweak to focus on D trend above/below the 50 RSI level where trends last for weeks we are no longer scalpers.
Is the daily trending, 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 www.vantagefx.blogspot.com 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.
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.
Charts attached, D is above the 50 level for the last month, entries from 1hr. A few examples (not all successful) shown.