A-B-C-D Trade - page 341
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We just spoke about secondary confirmation at the EUR/USD 68.6% pullback level June 18th/19th.
Applying the Standard Deviation Channel (orange color), set on 2 Deviation, with plot points using 2 lows of Apr 4th and May 17th, then aligning the Fib Channel (blue color) to stack going upward, we arrive at that peak as the 100% expansion!
Our numerous post on this subject identified these scenarios as S&R bounce trade opportunities.
We’ve all heard about “hang onto your winners and cut your losers”. It is not that simple. Even the most disciplined traders will still face reality derived from the lack of understanding in “probability”.
We flagged down an article that explains how probability can be factored into reward/risk scenarios. However, it requires an input for probability, and most retail traders do not know this aspect of their “system” or technique.
This author/blogger, Peter Brandt, posted an article on this matter as it related to his trade. He stated that the R/R was 11:1. However, after factoring in probability, it became 1.6:1. He claimed to have a general estimate on the probability %, since he had been using that technique for a very long time.
Applying trade probabilities to reward/risk ratios | PeterLBrandt
or cut & paste: peterlbrandt.com/applying-trade-probabilities-to-rewardrisk-ratios/
Mr. Brandt also has posted a large volume of pattern recognition charts and comments, for those of you that are interested.
Applying probability to a technique we've presented here (FCT), the attached excel calculator and pic displays results for a triangle measuring 50 pips to the 100% retrace.
The 12.5% S/L + 5% for spread = Risk of 17.5%
The take-profit levels of 31.4%, 50%, 68.6%, and 100%, are expressed as TP1 through TP4.
RPT = Risk Per Trade. This example uses 2%.
Probability input as win/loss.
IF Probability are:
TP1 = 70%
TP2 = 60%
TP3 = 40%
TP4 = 20%
The net result and return on starting balance is Net X RPT:
TP1 = 19%
TP2 = 26%
TP3 = 19%
TP4 = 7%
This example shows how hanging onto potentially larger gains is not always the right decision.
Obvious coordinates for this plot used for a SELL opportunity.
Handle = May 17th Low 1.27953
Upper Corner = June 19th High 1.34156
Lower Corner = July 9th Low 1.27541
Now, let's step down to the 4-hour time frame. Align the fib channel to the middle and lower fork levels. We have already outlined the interior ratios (take-profit) and exterior ratio (stop-loss) in previous posts*.
We ca see price action reach the middle fork level on July 10th**. An overshoot was contained by our stop-loss (S/L), and price subsequently made a decline to 1st 2 take-profit (TP) levels.
Since this is a larger time-frame, the reward/risk (R/R) ratio is higher, and approximately:
TP1 = 2:1 (hit July 11th)
TP2 = 3:1 (hit July 15th)
Since the slope of the APF is upward, we need to remember that a sell is counter-slope. This means as time elapses, the TP is reduced and the S/L increases.
A few candle periods until exit usually doesn't matter much, but too many candles elapsing will erode the R/R significantly.
This can impact your decision to stay in for a possible gain to TP2. As we just posted, the "probability" factor needs to play a role. If you don't have an estimated probability, trailing the stop is an option. This is all trade management, and different traders will use different methodologies.
Smaller distances to S/L and TP may experience stop-outs due to minor price fluctuations.
Since we are featuring EUR/USD, it's easy to calculate precise R/R, since the pip value ($10) is fixed. To newbies: All pairs that have USD as the 2nd symbol is fixed at $10 per pip. Other pairs require using a special pip calculator which can be found on many sites.
One can be found here: Pip Value Calculator
Calculate the entry pip value and the proposed exit pip values of your TP AND S/L.
* you can use the "Search This Thread" function and key words FCT or fib channel.
edit: ** the retrace from the leg upper corner to the lower corner was 68.6%. That was where the stop loss was too. This ratio was discussed and used in the overall set up of the FCT/fib channel.
It replaced the traditional 61.8%, which probably bothers a lot of traders that have been using Fibonacci for a long time.
Pertaining to the interior ratios of the FCT/fib channel, my reasoning is to take 31.4% from both sides of the Fib Channel.
100% minus 31.4 = 68.6
Let's review a very old plot that was posted Jan 11th 2012 for long-term trading. It was a GannBox plot on EUR/USD Weekly. You can find it on post #2722 and #2724.
Plot point was June 6th 2010 low 1.1875
Height of box (prices) = 3600 for 4-digit and 36000 for 5-digit brokers
Width of box (times) = 360 (default)
Indicator can be found in the "Gann Is The Man" thread.
We illustrated price at the red 1X1 angle (support), which was the major S&R of Gann's technique with his angles.
Note that this is probably the only way to use Gann angles properly on the MT4 platform. This is due to the platform's inability to have its fixed 1X1 scaling be viewed properly. The charts must be fixed to 1X1 scaling.
The GannBox 144 indicator allows us to lock in the height and width, which essentially is scaling.
To test scaling, all we have to do is move the charts in or out of zoom, or increase/reduce height, to see if the angle lines stay affixed. For example, the Gann Fan tool does not stay affixed.
Back to the analysis. In addition to our comments on resistance for this BUY opportunity, we can use the often discussed fib channel tool.
Price tested the 1X1 angle and fell slightly below it. When using the fib channel tool, and what we have named it for our technique - the Fib Channel Triangle (FCT), it is plotted:
A = June 6th, 2010 low 1.1875
B = May 1, 2011 high 1.49389
C = Jan 8th, 2012 low 1.26229
The FCT is while color on the attached chart and is overlaid onto the GannBox.
We can see how price bounced off the 1X1 and hit the FCT 31.4 level almost precisely on Feb 19th.
The FCT's -12.5% was a S/L option, while a very tight one could have been the gray colored 1/4angle4 0. You can mouse over the angle line to read the labels.
The subsequent dip on the week of July 22 was 31.4% below the FCT.
The bounce up from there was contained by the red 1X1, with a slight overshoot. That move retrace 50%.
Another way to plot the GannBox is to use the actual number of pips from a major swing, for the height of the box.
Let's use the last 5 year's high/low of 1.6038 (July 2008) and 1.1875 (June 2010). The difference is 4,163 pips. We input 41630 for 5-digit broker charts for height (prices).
Drag that arrow (double click) at the corner of the box to align with the 1.6038 high. Remember, if the GannBox doesn't shift properly, change the time-frame one level higher (monthly) and then change it back (weekly).
This plot produced its red 1X1 angle line that matched the high of 1.5143 on Nov 22, 2009.
The plot sets up a SELL opportunity the next time price rises to that 1X1 angle line, which occurred on Apr 17, 2011. The overshoot would have stopped out a tight S/L. Therefore, we must have a reasonable way to allow some room.
The previous high of 1.5143 (Nov 11, 2009) was most prudent. The Blue 36 horizontal line (2/8th) was another S/L option.
After peaking at 1.4939 on May 1, 2011, price turned to the downside. We can adjust our Fib Channel tool or regular Fib Retracement tool, for more precise Take-Profit (TP) levels. low/high = 1.1875/1.4939. You can use the traditional fib retrace ratios or the 31.4/50/68.6 levels.
Price made a precise hit to the 31.4% retrace level, same as the GannBox's blue 72 level (50% of box), on May 22, 2011. Price chopped its way down further, and respected each level of support.
Next post: yet another way to plot the GannBox.
We've detailed 2 ways to plot the GannBox.
1) Use Gann numbers for height, such as 360 + add zero = 3600 for 4-digit borker charts and 36000 for 5-digit charts. Can use the nearest Gann number, such as the 4 numbers: 90, 180, 270, 360.
We can also use the numbers displayed on the right side of the GannBox, 18, 36, 54, 72, 90, 108, 126, 144. Simply add enough zero to get desired height.
All this time, we left the width (times) on default of 360. Since we are on the weekly time-frame, there are no inaccuracies as found on the daily, with calendar days versus trading days.
2) Aligning 2 dips or 2 peaks to the 1X1 for the plot, to set up trade opportunity at the next (3rd) hit to the 1X1.
3) We can use the number of pips of a major swing, per example just posted, for the height. Add enough zeros to that number.
4) Here are our most recent thoughts.
Considering Gann angles had to be scaled on a 1X1 basis, we therefore surmise that the GannBox plot can also adhere to that principle.
Let's take the last post and its plot. If height was 41630, then width should be 416. We can see on the attached chart that the red 1X1 angle line is lowered slightly. It also was respected further down the road as resistance again, on Jan 27th and June 16th, 2013.
If you want homework:
Adjust the GannBox plot for the number of pips on the June 6, 2010 to May 1, 2011 swing, on basis that the height and width are balance out at 1X1.
Observe where the Jan 27th and June 16th peaks are in relations to resistance AND in relations to our 41630/416 plot.
We haven't spoken about divergence for quite a long time. Identifying divergence is a forward-looking analysis.
We like to use RSI set on a fast 4-period. We posted automatic indicators that can spot some of the regular divergence and the reverse divergence.
Attached is Crude 1-Hour, with 3 location featuring divergence.
1) the 2 peaks of June 14th and 17th
2) the 2 peaks of June 18th and 19th
3) 2 dips of June 21st and 24th
All 3 sets of peaks and dips were at the extreme over-bought or over-sold levels. We use 85/15 for OB/OS setting to generate the lines for guidance.
We advocated using a cross-over technique as the trigger for entry, preferably on a lower time-frame than the initial time-frame with divergence. We favored the Ehler's Fisher Transform Histogram, but many of these are very similar.
An alternative trigger is to use the RSI, when it crosses the mid-point. Since it's already on the chart for divergence, it would keep it less cluttered by too many tools/indicators.
Once a candle period has closed past the mid-point, entry is made. The following are date/time for each of the above opportunities.
1) June 17th 13:00 GMT
2) June 19th 11:00 GMT
3) June 24th 09:00 GMT
Note charts are GMT +3, but when we list times, we make adjustment to GMT.
The 2nd and 3rd opportunities were good reversals. Add Reward/Risk assessment by using fibs, etc., to target take-profit levels. The stop-loss would be just above/below the divergence pivot.
Here is an example for USD/JPY 4-hour, where we combine our divergence technique with support/resistance (S/R).
A = May 22nd 16:00 GMT high 103.73
B = June 13th 04:00GMT low 93.78
C = July 7th 20:00 GMT high 101.52 (78.6% retrace of A-B)
We have the gray color fib retracement for A-B swing. Point C is at the 78.6%.
Now we can deploy the fib channel triangle (FCT) (blue) for those 3 swing points.
Two SELL opportunities at the upper channel. The first is at Point C, and we have always identified 78.6 as a major reversal point for the FCT.
The 2nd opportunity was a revisit of the upper channel, on July 19th 00:00 GMT.
Both had divergence as identified with RSI(4). Both declined to the 31.4% (+300 pips), with the 2nd opportunity dropping further for +500 pips thus far.
Here's another CL chart analysis. This time it's a 4-Hour time-frame, with swings:
(Chart is GMT+3 Hours, but we list below in GMT.)
A = July 19th 10:00 GMT High 109.30
B = July 30th 14:00 GMT Low 102.68
C = Aug 2nd 02:00 GMT High 108.76
Chart 1) The Fib Channel Triangle (FCT) is aqua blue color, and is positioned to the 3 swings, with the 2 peaks representing A and C.
We can see price bounce down off of the A-C trendline Aug 16th 14:00 GMT. Divergence was also evident, while using RSI set on 4-Period.
There was also a bounce up off Plot Line B on Aug 8th 14:00 GMT.
The Standard Deviation Channel (SDC) is in orange color and plotted on Point A and Point C, with input setting of 2 deviation. The 50% expansion level to the upside provided resistance, while the upper channel provided support for take-profit (TP).
Chart 2) Applying the Andrew's Pitchfork (APF) tool (white color) to the 3 swings, with Point A as the Handle, we have a bounce off the same location Aug 16th 14:00 GMT. This is the 50% expansion of the APF.
To see the expansion levels, we align the FCT to the APF's upper and middle fork lines, and drag upwards. The interior levels of the FCT will give us our Take-Profit (TP) levels. The upper exterior level (dotted line) can be used as the tightest stop-loss.
*
The ABC swings were very obvious in this example. This usually leads to true (more exact) adherence to future support and resistance.
Use of the RSI Divergence gives us a "leading" tool, comparable to looking around the corner before arriving at the street.
90% + of tools/indicators used are telling us what happened in the past (lag).
If you use support & resistance, together with divergence, you potentially are AHEAD of the crowd.
Very often, you will have exited the trade with profit, before others enter with their lagging indicators.
This is not to say you can't use a momentum trigger for entry, on a lower time-frame, as illustrated in a recent post.
This is a 1-hour chart of USD/JPY, with GMT + 0.
We applied the SDC (yellow color) to the 2 peaks of Aug 19th 14:00 GMT and Aug 21st 18:00 GMT.
We aligned the FCT (white color) to the full size of the SDC, and drag upward. This of course sets up a SELL opportunity, when trading the bounces off expansions.
Price met the 100% expansion level on Aug 22nd 09:00 GMT. We can see respect given to the tightest stop-loss level (dotted line above upper channel), which is set on 12.5% of the interior space of the FCT.
RSI(4) divergence was also evident.
The first TP level of 31.4% was respected during the Aug 22nd 12:00 candle period.
Price also bounced down at the 50% expansion level during the Aug 22nd 01:00/02:00 periods.