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Price failure trading

  • #1
  • First Post: Aug 12, 2010 11:54am Aug 12, 2010 11:54am
One of the biggest problem when I started trading three years ago is believing in price patterns that the professionals trade. This kept me from pulling the trigger at the right time. This lack of belief comes from the fact that I am a Mathematician and my rational mind needs a reason for doing things. Over the last two years I have analyzed many charts and have developed "PRICE FAILURE TRADING".

Many persons also suffer from this belief system. This maybe the reason for your failure as a trader.

I am starting this thread to share my "rational" belief system and my trading method so that others may benefit in their trading.

Hope you will join me with positive discussions. In my next post I will outline the reasons why the head and shoulder and the clasic 123 patterns are as a result of price failure. This price failure results in a great probability of a new trend.

Welcome all
  • #2
  • Aug 12, 2010 12:13pm Aug 12, 2010 12:13pm
got me intrigued.
  • #3
  • Aug 12, 2010 1:36pm Aug 12, 2010 1:36pm
Should be interesting!
  • #4
  • Aug 12, 2010 2:36pm Aug 12, 2010 2:36pm
Quoting Troikaone1
Should be interesting!
I am looking forward to your insights and discussions.

RR
  • #5
  • Aug 12, 2010 6:57pm Aug 12, 2010 6:57pm
A lot of patterns really reach conclusions that you'd expect from simple higher high/lower low/higher low/lower high analysis.

Take head and shoulders for example,

It's a HH, HL, HH, Equal Low, LH, LL.

If price fails to make a HH then makes a LL, you'd expect it to be reversing anyway.

I see that with a lot of patterns, but like anything patterns are never 100% accurate. Just extra evidence for the validity of a trade.
  • #6
  • Aug 12, 2010 10:30pm Aug 12, 2010 10:30pm
In this post I will explain two different 123 patterns and how to trade them based on "PRICE FAILURE TRADING" system. The trades taken is in relation to a trend line. To be clear I did not profit from the trades depicted here in. The post is just to explain the 123 pattern with respect to price failure as it make sense to me.

In the first chart we have aspect no. 1 as the last high. Aspect no. 2 represents the next swing low while aspect no. 3 represents price failure to make a new high. Confirmation of the 123 pattern normally comes when price falls below aspect no. 2 triggering a trade.

So far this is more or less the classic 123 pattern trading. Our focus here though is on "price failure". When we combine the trend line break with price failure before the break, the trade can be taken upon the break (candle close below)of the trend line. Connecting aspect no.1 and aspect no.3 is the probable new trend line that price will respect.

In the second chart we have the trend line breaking before price failure, aspect no.3. Since the market is not perfect no trade is taken after this break(even after candle close) because price could turn around and still make a new high. In this case we wait for price to turn around and fail to make a new high, aspect no.3. This is commonly refer to as a retest of the back of the trend line. The trade is taken when price falls below the aspect no.2. Connecting aspect no.1 and aspect no.3 is the probable new trend line that price will respect.

Of course nothing is for sure so we live with the probabilities.
Attached Image(s) (click to enlarge)
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Click to Enlarge Name: 123 pattern2.jpg Size: 53 KB
  • #7
  • Aug 13, 2010 7:50am Aug 13, 2010 7:50am
The head and shoulder pattern, although touted a lot, is one of the most difficult to trade. It is a complex pattern that unless you stumbled upon it after it is formed you may have taken several hits to your account before seeing the pattern. Moreover the pattern looks different each time and "VIEWER DISCRETION IS ADVISED". With PRICE FAILURE TRADING we view the head and should pattern as several failed attempts at "price failure" of the 123-pattern.
The first failed attempt at the 123-pattern is at the red trend line. Here there is no price failure before the break of the trend line and thus no trade is taken until aspect no. 3 is observed(chart 2 of previous post). Price however rally to create a new high and hence creating a second trend line, "blue".
The second failed attempt at the 123-pattern is at the blue trend line. This time price rally, failing to create a new high (price failure), but created the third trend line, "red".
This series of attempts at the 123-pattern to follow through creates the head and shoulder pattern and give precise entry to the trade once price fail at the right shoulder and break(close below) the green trend line. Notice that connecting the head and right shoulder gives a new "probable" trend line that price may respect on its way down.
Of course anyone who has traded the head and shoulder knows that it can and does fail to follow through at times. Hence we roll with the probabilities.

Again, I hope that this will help "rational-mind" traders who need an explanation with the usual patterns. Usually, one is told here is a pattern, this is where you get in, without any reason as to why. We are saying it is just "PRICE FAILURE". Couple this with the trend line and you have a powerful system.
Attached Image (click to enlarge)
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  • #8
  • Aug 13, 2010 1:52pm Aug 13, 2010 1:52pm
I read with great interest your theories and find intriguing what you propose. I would present 3 questions for your consideration and ask that you answer.

1) What method or manner to you use to determine a "swing point". Meaning how do we know (until its already too late) where a swing high (or low) is taking place in real time so as to evaluate the break out entry.

2) What method or manner do you use to draw your trend resistance (and or support) lines. How is a "false" break of a trend line considered. False break meaning one that breaks for may be 1-3 time frames then moves higher to eventually create an higher high...(in the case of a long)

3) At what point do you consider price has "failed"? Again in retrospect these are simple and obvious, but on the "bleeding left edge" everything gets a bit more fuzzy. How do we evaluate these in real time.
  • #9
  • Aug 13, 2010 2:03pm Aug 13, 2010 2:03pm
very intriguing indeed. i will test on the majors what i understand of this price failure strategy, and then get back with results. thank you.
  • #10
  • Aug 13, 2010 3:42pm Aug 13, 2010 3:42pm
Oh, another one like me! I am also a mathematician by training, and I have tried hard to think my way to optimal trading. Trying to think or justify entries and exits have been a hard habit to fight. So my slogan is now - trade what you see, dont think!

It is humbling for the rational mind to realise that it has nothing to add to the process of trading. Strategy development is one thing, but when it comes to actual trading the rational mind has simply to shut up and follow rules. A hard pill to swallow...

Your strategy is very similar to Dave Vantage's HL, LH system. See

http://www.forexfactory.com/showthread.php?t=108544

See also Islander's brilliant way of trading HL, LHs at

http://www.forexfactory.com/showthread.php?t=214628

Looking forward to hearing more about your "rational" belief system!
  • #11
  • Edited 1:02am Aug 15, 2010 12:48am | Edited 1:02am
Quoting gspajon
I read with great interest your theories and find intriguing what you propose. I would present 3 questions for your consideration and ask that you answer.

1) What method or manner to you use to determine a "swing point". Meaning how do we know (until its already too late) where a swing high (or low) is taking place in real time so as to evaluate the break out entry.

2) What method or manner do you use to draw your trend resistance (and or support) lines. How is a "false" break of a trend line considered. False break meaning one that breaks...

Hi gspajon,

Thanks for your interest in my belief system. I will try to answer your questions as I understand them.

In regards to your first question I use the standard definition of a swing high of at least 3 candles with the middle one higher point than the remaining two. However more candles may be in the mix.

For question two, I like to draw my trend line connecting the swing lows/highs of the swing high/lows starting from the most recent and look back. Of course this may lead to several trend lines which is still quite OK.

By the time you discovered a false break of a trend line it is too late. However, our discipline trend-line-break trades are taken only when there is price failure prior to the break of the trend line and candle close below/above the line. In this case the trade is taken.

If the price move to take out the stop above/below price failure there is nothing we can do but tip your hat to the market. Remember that we have no control over the market and big players can move it in any direction the like. We have to roll with the probabilities.

As for your third question, for bull market, any swing high lower than the last is a price failure. If price failure is above the trend line and price then follow through to break(candle close below) the lower trend line, then our price failure is confirm and tradable. If price failure occurs after trend line break and price then follows through to take out the last swing low then our price failure is confirm and tradable.

It is the interaction between the trend lines and the price swings determine the "tradability" of the price failure.

If price failure occurs too far after trend line break, then we may have to let the trade go.

I hope that this explanation helps
  • #12
  • Aug 15, 2010 7:02am Aug 15, 2010 7:02am
Hi Inkuumba,
Thanks for sharing your method. What time frames do you use? Thanks.
  • #13
  • Aug 15, 2010 7:18am Aug 15, 2010 7:18am
Great thread and I'm really looking forward to more insights. I'm going to keep quiet for now.
Gone to a better place
  • #14
  • Aug 15, 2010 10:22am Aug 15, 2010 10:22am
Quoting medici
Oh, another one like me! I am also a mathematician by training, and I have tried hard to think my way to optimal trading. Trying to think or justify entries and exits have been a hard habit to fight. So my slogan is now - trade what you see, dont think!

It is humbling for the rational mind to realise that it has nothing to add to the process of trading. Strategy development is one thing, but when it comes to actual trading the rational mind has simply to shut up and follow rules. A hard pill to swallow...

Your strategy is very similar...
Hi Medici,

Thanks for your comments and links you provide. I agree with you that the rules must be followed(as best as human can). But here in lies the problem. It is hard for the rational mind to follow a set of rules given to it without justification. This mind needs to believe in the rules it follows. In a sense one must own these rules. Hence the belief must be rational.

The patterns dicussed in post 6/7 are reversal patterns. What was missing for me in the rules is just a simple idea that kept me from believing and following the rules.

Here is the idea:
Price failure and it confirmation(aspect no. 3 in post 6/7) together with the last swing high(aspect no. 1) sets up the new probable trend line that price may respect. Hence a new trend is probably born.

All the explanations that I have seen previously end at the point of entry below the neck line,below aspect no. 2, etc. They did not extend to justify the new trend formation.

This new trend line also provides early structure and early warning to a failure of the trade to carry through.


Here is the most important part of my observation though:

I am trading the same patterns almost in the same way the intelligent money is. However, I now have a rational basis for believing the patterns.
  • #15
  • Aug 15, 2010 10:29am Aug 15, 2010 10:29am
Quoting whipsawed
very intriguing indeed. i will test on the majors what i understand of this price failure strategy, and then get back with results. thank you.
Thank you whipsawed, looking forward to talk more
  • #16
  • Aug 15, 2010 10:37am Aug 15, 2010 10:37am
Quoting yesbee1
Hi Inkuumba,
Thanks for sharing your method. What time frames do you use? Thanks.
Hi yesbee1,

The price failure pattern is to be found on all time frames. I look at all time frames. Most of the trading entry decision are taken on M5 and M15 (Risk management) having analyzed the higher time frames for market direction.
  • #17
  • Aug 15, 2010 1:35pm Aug 15, 2010 1:35pm
Quoting inkuumba
Hi Medici,

Thanks for your comments and links you provide. I agree with you that the rules must be followed(as best as human can). But here in lies the problem. It is hard for the rational mind to follow a set of rules given to it without justification. This mind needs to believe in the rules it follows. In a sense one must own these rules. Hence the belief must be rational.

The patterns dicussed in post 6/7 are reversal patterns. What was missing for me in the rules is just a simple idea that kept me from believing and following the rules....
Thank you, inkuumba, for your response. If I understand your method correctly, you would have traded the Euro Friday morning as indicated in the attached chart.But what would you have made of Cable for the same morning? No trade?
Attached Image(s) (click to enlarge)
Click to Enlarge Name: inkuumba eur 15 aug.gif Size: 22 KB
Click to Enlarge Name: inkuumba gbp 15 aug.gif Size: 20 KB
  • #18
  • Aug 15, 2010 1:49pm Aug 15, 2010 1:49pm
Let test my understanding with Aussie as well. No trade because of trend-line break before price failure?
Attached Image (click to enlarge)
Click to Enlarge Name: inkuumba aud 15 aug.gif Size: 24 KB
  • #19
  • Aug 15, 2010 1:54pm Aug 15, 2010 1:54pm
Quoting inkuumba

Here is the most important part of my observation though:

I am trading the same patterns almost in the same way the intelligent money is.
Would you mind providing a bit more detail on this?
  • #20
  • Aug 15, 2010 9:58pm Aug 15, 2010 9:58pm
Hi Guys,

I have taken a quick price failure counter trend trade on the EURUSD on the M5 chart. The market move 15 pips in my favor and is consolidating so I have move stop to breakeven. Counter trend is generally more risky so one has to be more aggressive in protecting capital.

Notice that price has failed(aspect no. 3) before trend line break so a single candle close after break of trend line triggers trade.

Lets see how the dice rolls
Attached Image (click to enlarge)
Click to Enlarge Name: 123-pattern_eur.jpg Size: 82 KB
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