On this thread we will trade the "U" shaped pattern, which is very very very frequent on the EUR/USD, it repeats in almost every HOUR!
(on M1 timeframe) The pattern is a volatility based pattern, which by default means that we will look at the volume to check the breakout, and possibly the ATR indicator can also be used.
Here are the characteristics of the pattern illustrated:
The bearish version of the pattern:
The bullish version of the pattern:
Characteristics:
- The pattern always starts with a breakout in either direction, which consists of 1-3 long candles, short candles dont count, the longer the candle the bigger chance for the pullback to happen
- The initial breakout is always accompanied by a volatility/volume increase, so if you trade with MT4 like me, you might wanna check the volume for increase, or you can use a period 14 ATR to check it.
- The pullback is usually bigger or the same size as the initial breakout
- The second phase of the pattern, when the initial breakout is over, is a consolidation or a range phase, when the bulls and bears fight to control the price, this is characterized by a constant, yet similar volume level.A consolidation phase, with small candles is better, but a ranging whipsaw phase is also acceptable,but it must not be bigger than the breakout candles range. So small consolidation candles have a higher chance for pullback
- The consolidation phase has also a higher chance for pullback when the candles are flat and following a S or R line, if they are rounded, like the rounded top pattern, then its not valid, so they must be aligned horizontally after one another without any inclination, an inclidation in an angle suggests that the pattern is not as valid.
- The third phase is the pullback phase,when the price pulls back itself to equilibrium state, since the initial breakout is so big and unsustainable the price must pull back itself to the original balance state, this is what we will trade, the pullback!
How to trade it?
- Recommended pairs: High volume, high volatility pairs, with preferably small spread.And also must be a very choppy market, trending markets are not that good for this, so obviously the best pair to trade is the: EUR/USD
- Recommended timeframe: Any timeframe you want,it appears almost as frequent on every timeframe,but if you have a big daily average spread , then try higher timeframes like M15 or M30, but i can trade this pattern even at M1.
- Recommended time to trade: Well since we trade the EUR/USD, try to stick yourself in high volatility time, so it should be traded only between the LONDON-NEW YORK session,you can check the FOREX FACTORY calendar to see what time is that, 7 AM -> 9 PM usually @ GMT +0 in summer and 8 AM -> 10 PM usually @ GMT +0 in winter.
- Market type to trade: avoid times when the market trends, it works better in choppy ranging markets
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ENTRY CONDITIONS: A breakout in either direction which lasts 1-3 candles, accompanied by a volume increase
ENTRY POINT:
- After the initial breakout is over, wait a bit to see if the consolidation starts to form
- NOTE: small candle consolidation is better than a whipsaw ranging phase
- After you see the consolidation formed enter in the opposite direction than the initial breakout, so for the "U" pattern, go bullish (BUY) and for the inverted "U" pattern go bearish (SELL)
STOPLOSS: A few pips above/ below the maximum high of the consolidation, so if you waited 2-3 candles after the initial breakout, and see that those 2-3 candles are in consolidation, then just check the maximum high or minimum low of the candles and put the SL above/below it by a few pips (YOU SHOULD HAVE A POSITIVE RR, SO SIZE THE SL ACCORDING TO THAT)
TAKEPROFIT A few pips less than the low of the initial breakout candle, since we know that the price will only pull back to the initial level so we must cut our profit earlier than that in case that the price stops a few pips before.
You can customize the TP/SL levels but you must note that you should have a positive RR, meaning the TP winning to be bigger than the SL losses.
Here is my yesterdays trade example how i traded this pattern:
I hope you can understand now this pattern, good luck trading it!
Last but not least:
RULES OF THE THREAD:
- NO TROLLS, any troll will be banned immediately!
- (Try to) stay on topic!
- NO FLAME WARS, and NO INSULTING EACHOTHER, try to keep this thread an intellectual debate!
- Trade this system and show picture of your trades,your observations about the system & the pattern, and help improve this system!