It's the Pattern, Stupid!

[NoDoji]

I can understand tactic 2 but I'm lost for tactic 3. For example, when price pulls back to D and does not run any further up past D for both tactics, the actions are different? For tactic 2, you trail the low whereas for tactic 3, you put a sell stop at D? For tactic 3, which trendline are you referring to? I don't understand the phrase "price turns back in the direction of the trend line break without running much further" for tactic 3.

This chart pattern offers a full array of technical price action trades that produce a profit equal to the maximum necessary risk more often than not. (If you're looking for something that works almost all the time, ditch trading and get a job where other people pay you on regular basis.)

For tactic 3, I'm referring to the Lower Trend Line (LTL) of the uptrend in progress at the start of the pattern as illustrated below. Keep in mind that the initial break of a trend line in a defined trend tends to fail (#1 on the chart). With-trend traders will initiate or add to a position on a pullback to a trend line. The "weak hands" will have stops just below the trend line and if the trend line breaks weakly (as illustrated at B) they will often chase the market to get back in long and the early shorts who sold the initial TL break will buy to limit their losses when they realize they're trapped. Initial breaks of a trend line that break weakly more often than not result in a test of (and usually a break of) the previous high (assuming an uptrend). On the chart, the initial break of the TL resulted in a new high (C).

For tactic 2, I begin trailing a sell stop (almost always using a smaller bar interval than my main trading bar interval) once the pullback price reaches B (#4 on the chart showing previous support now becoming resistance at E).

I also frequently use tactic 1 and simply place a limit order to sell B or tick below B. When it works you get an awesome entry price near the turn and when it fails, you can exit with a small loss.

(I also frequently enter at the 2nd break of the trend line if the last new high was fairly weak compared to the previous new highs. Al Brooks refers to this as "shrinking stairs". See #2 on the chart)

If for some reason I didn't enter on the 2nd TL break or later using tactic 1 or 2, I will place a sell stop just below D, treat it as a breakout trade, meaning it needs to break with conviction, and use an initial profit target based on a move equal to the move from C to D.

As for stop placement:

Early entry (#2) = stop just above C

Tactic 1 (#4) = stop of $50-$70 per contract

Tactic 2 (entry somewhere between price E and midway to D) = stop above E

Tactic 3 (break of price D) = stop of $50-$70 per contract or immediate scratch if price beaks only by a few ticks

 

[Q3D]

This chart pattern offers a full array of technical price action trades that produce a profit equal to the maximum necessary risk more often than not. (If you're looking for something that works almost all the time, ditch trading and get a job where other people pay you on regular basis.)

For tactic 3, I'm referring to the Lower Trend Line (LTL) of the uptrend in progress at the start of the pattern as illustrated below. Keep in mind that the initial break of a trend line in a defined trend tends to fail (#1 on the chart). With-trend traders will initiate or add to a position on a pullback to a trend line. The "weak hands" will have stops just below the trend line and if the trend line breaks weakly (as illustrated at B) they will often chase the market to get back in long and the early shorts who sold the initial TL break will buy to limit their losses when they realize they're trapped. Initial breaks of a trend line that break weakly more often than not result in a test of (and usually a break of) the previous high (assuming an uptrend). On the chart, the initial break of the TL resulted in a new high (C).

For tactic 2, I begin trailing a sell stop (almost always using a smaller bar interval than my main trading bar interval) once the pullback price reaches B (#4 on the chart showing previous support now becoming resistance at E).

I also frequently use tactic 1 and simply place a limit order to sell B or tick below B. When it works you get an awesome entry price near the turn and when it fails, you can exit with a small loss.

(I also frequently enter at the 2nd break of the trend line if the last new high was fairly weak compared to the previous new highs. Al Brooks refers to this as "shrinking stairs". See #2 on the chart)

If for some reason I didn't enter on the 2nd TL break or later using tactic 1 or 2, I will place a sell stop just below D, treat it as a breakout trade, meaning it needs to break with conviction, and use an initial profit target based on a move equal to the move from C to D.

As for stop placement:

Early entry (#2) = stop just above C

Tactic 1 (#4) = stop of $50-$70 per contract

Tactic 2 (entry somewhere between price E and midway to D) = stop above E

Tactic 3 (break of price D) = stop of $50-$70 per contract or immediate scratch if price beaks only by a few ticks

View attachment 159251

Somewhat interesting, but this should all be seen in relation to the previous days' PA to avoid committing the same fallacies as Brooks does in his potentially reckless sales pitches.

Also, trendlines and 2nd breaks of trendlines are much less reliable for precise stop placement now that the few non-computer traders on markets like the ES use a mix of tick, volume, minute, renko, and range charts, unlike what is suggested in Brooks' books regarding reliability of 5-minute-bar trendlines.

 

[ubo]

Thanks Nodoji. I almost wanted to get k p's help (our resident translator for your chart analysis) to explain your insights but he seems to have dropped off the ET radar.

 

[baro-san]

The Mother of all PA/TA.

A father ...

 

[romik]

According to Autochartist inverted H&S in an uptrend statistically carries the highest probability.

 

[NoDoji]

Somewhat interesting, but this should all be seen in relation to the previous days' PA to avoid committing the same fallacies as Brooks does in his potentially reckless sales pitches.

Also, trendlines and 2nd breaks of trendlines are much less reliable for precise stop placement now that the few non-computer traders on markets like the ES use a mix of tick, volume, minute, renko, and range charts, unlike what is suggested in Brooks' books regarding reliability of 5-minute-bar trendlines.

My many years of stats are based on a 5-min chart with a 1-min cross-reference for entries and a 6-8 hour lookback window of which to draw trend lines when applicable (continuous thru the overnight session into RTH because I trade futures; if I traded stocks I'd look at the previous day). Therefore, what other traders use is irrelevant to me. Hopefully, they've done their own statistical analyses based on their foundation/framework for trading.

I would never place a stop loss above/below a break of a tend line. That makes no sense to me based on my personal trading plan. I don't find a trend line reliable in any way for stop placement. I may look to enter based on price reaction to trend lines, but placing a stop loss above/below that line doesn't seem like a high odds method of exiting a trade.

I've never heard an Al Brooks sales pitch. Does he actually "pitch" trading? I wouldn't wish trading on anyone!

I simply read and studied his first book thoroughly (it took me the better part of a year to get through 3/4 of it). The book opened my eyes to so many valuable concepts that the book's real value to me is the equivalent of a degree from Yale or Harvard.

 

[benwm]

A father ...
View attachment 159252

baro-san, is the key to trading this pattern seeing a weaker/choppier final up leg to highs? What sort of things do you look at make sure you're not jumping the gun with the short?

I'd guess you have to be sure that you're seeing enough relative weakness in that last up leg, otherwise you might be countertrending an up trend without sufficient evidence of a reversal. This type of entry could be quite risky if you are not careful. You possibly need to filter entries using additional criterion...maybe similar to Vic's 2B (bull trap) reversal pattern?


Would be interested to know if others trade Vic's 2B pattern.

 

[benwm]

In fact, though, if all the proper conditions are met, I usually enter on the 4th reversal point.

My understanding of "4th reversal point" is that you mean the second lower (minor) high (providing your other conditions are met). Did I get understand this correctly?

In the three examples you show, what makes F3 look a little different to F1 and F2 are the doji candles around the second lower (minor) high, perhaps indicating the second minor upswing has lost momentum. Perhaps there are some other factors that you are look to determine the likelihood of the flag failing, e.g. volume, longer time frames.

I wondered if you consider a bull flag to be a "failed" version of Vic's 1-2-3 pattern? Hence the reason for entering at 4 instead of 3, because otherwise you might confuse yourself trying to distinguish in real time between a 1-2-3 (sell at 3) and a bull flag entry at 3 (long).

 

[learner2007]

My understanding of "4th reversal point" is that you mean the second lower (minor) high

The point you've marked as 3 is what I meant as being the 4th reversal point.

 

[benwm]

The point you've marked as 3 is what I meant as being the 4th reversal point.

Ok, thanks for clarifying but could that not raise some confusion with 1-2-3 (shorting the break at 3)?

Anyway, it's bedtime for me now, so I'll give it some more thought in the morning! Goodnight from Europe.