HAC & RAC - A Simple-Minded Approach

Thanks for opening the thread. Watching with a great deal of interest and do get an imbalance between time frames is a great way to trade.
Cheers

gavin

Very interesting. Thanks.

AUDUSD Update:

Well, this happens now and then, but it appears that the Aussie is headed back north. H4 has yet to confirm, but all the other TFs had nice tight reversals - much better than the short side did. This is a case where, rather than allow your stoploss to be hit, it's better to either switch direction or exit.

Oh...that reminds me. I never talked about stops. I just put them at the swing high or low. At least that's how I calculate my risk percentage. But that doesn't mean I intend to lose that much when losses come.

USDJPY Update:

This hasn't turned long yet. It tried to last night, but I'm highlighting on M15, it was like it was chasing the HAC line, trying to cross. It was saying "Not yet! Not yet! I'm not perfect yet!"

On H4, I circled where it's likely headed first. But once there, again, we'll have to wait for the setup.

I don't like this pair right now though. It has the behavior of an extended triangle or other complex pattern in the making. That doesn't mean there won't be trades that set up on smaller TFs, but where H4 is concerned, it might be best to be conservative.

GBPUSD Update

Ok, as expected, this took off nicely. Now here is something that happens once in awhile. There are actually two active trades to the long side in operation on this pair right now. I've drawn a new set of targets on the last H4 signal. It's near a 2x level on H4 and on H1, as the HAC line on both TFs were in the same place. That's kind of unusual. Anyway, both RAC lines are also above 80 with their RSI's at or near 100. So far, so good.

But watch the 1x & 2x levels because a lot of times retracements happen in these places. If they do, then you can ratchet down to M15 and wait for an M15, M5, & M1 setup for a 3x target on the larger TF.

A lot of times, if a retracement setup like that happens, the PT on, say, M15 will be very close to the PT on the larger TF, or right on it.

You're welcome. I appreciate others looking at this with me.

You're welcome. Please ask questions when you have them. I'm sure they'll come

I have to go for a bit...have to take my dog to the vet. Anyway, keep an eye on USDJPY. It has hit the H4 HAC line and the RSI bounce setup is still active. But watch M15 to M1 for the setup. Be realistic and patient with it. Remember that the HAC line on the larger smaller time frame ought to be close enough to be crossed by the next larger time frame within an acceptable number of periods. I like to have at least 3 consecutive TFs align before pulling the trigger.

Ok..guess that didn't take long. Anyway, I just saw something on the GBPUSD trade. Below is an RSI/RAC bounce setup on D1. Notice that the 3x target I projected from H4 is right on the HAC on D1. I would think it's reasonable to believe it will reach this level and then reverse. But as always, wait...wait...wait for alignment! In most situations markets have to futz around for a bit before reversing. But it might be ok to use the lower TFs to set up a short once the 1.465 level is reached (or thereabouts).

I'm going to talk a little bit about how to view when a trade setup is 100% invalidated and how multiple trade setups might happen within a consolidation pattern.

A trade is 100% invalidated when:

1. The prior swing high (for shorts) is taken out prior to the HAC crossing.
2. The prior swing low (for longs) is taken out prior to the HAC crossing.

DO NOT hold on in hope if the trade is invalidated. A failed trade setup is the best reason to switch your bias. The reason I designed this method was to know, without any doubt, when I was wrong. Being certain when wrong is almost as important as being certain when correct.

In the GBPUSD situation, prior to the breakout to the upside, there were both long and short setups involved. The one that will win however is the one with the tightest setups. A tight setup is the most unlikely event to occur, yet it must occur prior to any large move. The tighter and cleaner it is, the more unlikely it is. It represents a kind of equilibrium point that has been reached. Such points are rare in the context of total market movement. Moreover, as you all know, markets tend to move away from equilibrium.

If you go back and look at every time there was an H4 cross of the HAC line and then compare how tight it was compared to the lower TFs, you'll see that the long side was the best. Also, bear in mind that the trade triggered on Jan 22nd was still active.

In the chart below I put on the profit targets of both active trades. The green lines are the PT levels from the 1/22 trade and the blue lines are from the most recent. The market has hit the PT on the first trade and has really reacted to it so I would expect some consolidation and then maybe an M15-M1 setup to make a run at the 3x target on trade #2, which also coincides with the HAC on D1.

This is actually a more difficult scenario compared to most, but since it's happening now I'm using it as an example.

USDJPY Update:

Ok, this is something to pay attention to. Recall that not long ago I said to look for a bounce from the H4 HAC. The market did not bounce up and no setups were there on M15. M5 & M1 barely did anything on their own either.

But take note that the HAC on H4 has been crossed. Also take note that the RAC on H4 is nowhere near crossing below 80. This is the purpose of the RAC. It shows when a trade in the opposite direction is worth taking (with a probability of success). This kind of activity however DOES point to a future consolidation pattern that will form. It's best to leave this pair alone for awhile. The RSI bounce setup is still active, but it will be some time before the lower time frames align themselves into a respectable trade. The HAC lines on those are still very far apart (see yellow arrows on lower TFs), so it's best to let them get a bit closer together first.

AUDUSD Update:

Recall that when I pointed out a trade to the short side, I also pointed out it would be choppy because the setup wasn't tight. When H4 triggered there were 11 hours difference between H4 and H1, which is a long time.

However, to the long side, there were only a few hours so it's likely going to take out the prior swing high. The relation between H1 & M15 is also very tight, as were the relations between M15 & M5 and M5 to M1. If one was short, then it would be wise to exit prior to allowing a stoploss to be hit. There's just no sense it in.

Also, if it looks like a setup from M15-M1 is setting up in the opposite direction (which it did in this case), and you have the time to watch it, then play it. Play it until the M5 HAC is crossed or something. That's ok to do, even though the longer TF trade is going the other way. At least you'll get something out of it if the longer TF doesn't work out.

AUDUSD - Further update:

Ok, in my haste to teach this, I forgot to see if there were any active H4 trades to the long side still in play (ones that haven't reached the 3x profit area) and there were two that were triggered on Jan 19th and another on Jan 20th. These were nice, clean setups. Also, you can see that it's been bouncing around both sets of PT lines on the way up. Anyway, it ought to hit the 3x level and might push past it to the 3x level on the most recent active trade.

Most times, there aren't this many active trades going on and things are simpler. Anyway, the "Pink" trade hit its PT a couple of times and then retraced to a "green" PT line from the trade that was triggered before it. That's why it's still going up now.

The last trade, the "orange" one, has a 2x line in the same place as the 3x line on the 'green' trade, so I would look for a retrace from this area and maybe even a short on a set of lower TFs (but again, waiting for alignment first).


This is one of the trickiest parts with this. Remembering to keep the overall context in mind and play the probabilities.

I wanted to talk about profit targets and why I put them where I do. For starters, they appear to work well But there's another reason. Logically, prior to any move, there's going to be a group of people who are on the correct side. This group will want to take profits at some point.

For the winning side, there is going to be a place where it's generally agreed upon where they are wrong. They will put up a certain amount of risk capital accordingly. Most often, it's at a prior swing high or low. That's why the measurement line begins there.

Now the equilibrium point, the point where all the TFs get together and say the same thing, is the line between the folks making money and those losing it. This is why the line ends here. The space in between is the "collective risk."

Collectively then, they will also begin to take profits and secure gains in typical human ways. 1:1 (for the most timid), 2:1 (for the conservative) and 3:1 (for the real pros). Think of these as the "collective reward."

Once all the reward is collected, what is left to do?

GBPUSD Update:

Ok, I put on a D1 chart to show it has now hit all the PT levels on all active long trades that triggered on H4. It is now at the HAC line on D1. Mission accomplished. Also, the RSI is popped to the top while the RAC is buried.

Next, we'll have to see what it does. After such a move it will take some time for it to figure out what to do. All the short TFs need to have their HAC lines get a little closer together, etc.. before a short is triggered. If this doesn't happen, then I would bet that it will gear up for another long. But again, this will take time.

AUDUSD Update:

The Aussie has hit all the 3x PT levels save one. Judging by the way it acted when the other trades closed out, I would say this last group of traders are holding on to 3x. Also, the HAC lines on the lower TFs are pretty far apart and don't appear to be lining up in any way.

Also, on the D1, the RAC has popped above 20 while price is still within the HAC area. This could mean some much higher prices to come. But like always...wait...wait...wait.

USDJPY - Continuation short to Long setup (hopefully)

Below is something happening on USDJPY. Note that M15 RAC is buried and its RSI popped to the top. At the same time, an M5 trade, backed up by a nice M1 signal, has reached a 1x profit target, which is on the green HAC on M15. The 2x target for M5 is on the red HAC on M15.

Now, given the nature of the UJ today I'd be reluctant to short this but if it works out, it will pull the M15 HAC down closer to the bottom, which could set up for a nice long trade back to the H4 or H1 HAC line. It's something to watch.

Hi Almuten


As far as l understand, this strategy is mainly about crosses from RAC, RSI(2) window's...Am l right?
Can you show some trades example with entries and exits...and the correlation between TF and all indicator together...
A step by step kind of trade plan should be great to help me figure out the full potential of this

Thanks

Hi Ben. It's really about the HAC (red line on the chart) and the market's relationship to it that's most important. The oscillator, or RAC, merely confirms whether or not a crossing of the HAC was merely market noise or if there was some statistical importance to it.

The 'unlikely event' that I'm looking for is the crossing of the red line from one time frame to another. First the M1, then M5, M15, etc... in rapid succession, along with a perfect RAC confirmation from each one. I'll find some past examples and post them.

Thanks for the question!

I have a feeling I might have gotten ahead of myself so I'm going to go over the fundamentals again to make sure I haven't confused anyone. Some of this is surprisingly precise in certain areas and it bears repeating.


The relationship between the HAC and the price is to determine when a change in trend is happening on that particular time frame. This is indicated by price crossing the HAC line. I use Heiken-ashi candles because it's easier to see this. Plus it allows for a bit of "slop."

When the market crosses the HAC line, I also want the RAC to make a cross as well. This can happen in two ways:
1. crossing its own average
2. crossing below 80
3. crossing above 20

*** If the RAC crosses its own average while above 80 or below 20, then do NOT consider that as a cross. While in these zones, the RAC crossing its own average has no relationship to the HAC. In fact, you'll see that if the RAC crosses its own average while in these zones, the market will not cross the HAC. It will still indicate a (usually small) change of direction, but it will not have the significance (generally speaking) necessary for a great trade.

If the market crosses the HAC, it has no significance unless the RAC has made one of it's crosses as well (again, in one of the three ways mentioned earlier).

A PERFECT CROSS has these elements:
1. The direction of the HA candle is up if the cross is up or orange/red if it is down
2. The candle is touching the HAC line
3. The RAC has either separated from it's average (the sharper the better) or has crossed down from 80 (for shorts) or up through 20 (for longs)