A-B-C-D Trade - page 318
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Update on our last GOLD 4H APF plot. We left off commenting on conservative BUY TP at intersection of HAMA_T3 zone and Lower_ML1.
Another example of "adjusting on the fly" was to make a 2nd APF using
Handle = 9-14 05:00 GMT high 1776.70
Upper corner = 9-21 13:00 GMT high 1786.20
Lower corner = 9-26 13:00 GMT 1735.90
Price currently at the new APF's upper fork (1st hit). This high also just about at the first plot's Upper_ML2.
Horizontal fib plot makes this peak the 88.6% retrace level $1780 (not shown).
This is another TP option.
We have a special presentation for you today. It requires that you are familiar with the basics of how to use the fib channel tool, which comes standard on the MT4 platform. For now, we can call this technique the Fib Channel Triangle (FCT).
1. Identify an A-B-C triangle. Until you get familiar with this, draw trendlines connecting the 3 points. This differs from the traditional use of the term triangle, which resembles a flag, and are used for breakouts.
For example, if A is the Low and B is the High, then C is the retrace point.
We can also draw/identify triangles where C is an extension of A-B. In the above example, C would be below B.
2. With the fib channel tool, there are 2 lines that must be dragged to certain points. The main line, which we’ll call “Plot Line A” (PLA) has 3 dots.
3. The middle dot is the one used to drag the entire line while keeping the slope. The other 2 dots are used to position line to 2 points.
The 2nd line, which we’ll call Plot Line B (PLB) has one dot, and must be dragged for positioning.
4. Position Plot Line A’s outer dots to the triangle’s Point A and Point C.
PLA = A-C
5. Drag Plot Line B to the triangle’s Point B.
PLB = B
6. Configure inputs of ratios in the fib channel’s “Fibo Levels” tab:
Levels = -.314 ------------------ Description = -31.4
Levels = -.686 ------------------ Description = -68.6
Note that those are “negative” numbers.
7. Similar to the inversion of 38.2 and 61.8, these 2 are also inversions of one another.
8. On a triangle with A-B pointing up, and B-C pointing down, we’ll call that a Bull Triangle. When A-B is pointing down, and C is point up, that will be called a Bear Triangle.
9. The retracement from Point C will first hit the -68.6. This simply means that measuring the distance between Plot Lines, we can anticipate that price will move to a ratio of 31.4% of that distance, from Point C. In our application, we have to invert that to -68.6%.
If the retrace is strong, it will next respect -31.4%.
After the -31.4, the next S&R would be the trendline B itself.
10. Practice by using a zig-zag indicator or the ZUP indicator, which will assist in identifying the swings. Understanding fib retracement and extension levels, OB/OS, and divergence can also help in getting a jump on locating Point C.
11. When you’re adapt at plotting these 2 ratios of -31.4 and -68.6, both of which are inside of PLA and PLB, you can add expansion ratios beyond PLB, such as 31.4, 50, 68.6, -131.4, -150, and -168.6.
The attached example is a 4-hour chart of USD/CHF.
A = Sept 13th 16:00 GMT High
B = Sept 14th 12:00 Low
C = Sept 20th 12:00 high (61.8 horizontal retrace of A-B)
After aligning PLA to A-C, and PLB to B, we have the -68.6 right at the Sept 21st 08:00 pivot low.
That was as far as price would retrace. A bull run subsequent to that pivot made an extension to the -168.6 on Sept 26th.
A trader might have used this plot to short off of Point C to the -68.6, which was just below the HAMA_T3 support.
A long at that -68.6 pivot was another opportunity, with TP at expansion ratios.
Plotting off the daily chart in order to see the swings, we have ABC plot points:
A = Sept 10th low 1.2754
B = Sept 17th high 1.3171
C = Sept 27th low 1.2827
Point C was a 78.6 horizontal retrace of A-B. Other assessments on this Point C level can be found in recent posts.
This was a BUY opportunity off of Point C, and gained a gross of 130 pips.
S/L options included the horizontal 88.6 retrace level of 1.2801. With cushion, risk was about 35 pips.
Trading to the -68.6, with cushion to about 1.2945, had TP of 115 net pips. R/R = 115/30 and ratio of 3.8:1.
When we reduce the time-frame to 1-hour, we can see the hit to the -68.6 during the 09:00 period. Price printed a high slightly above to 1.2959. Euro data released at that time.
Using RSI set on 4-period, described as RSI(4) and BAJA Divergence, we can see the BAJA Bearish Divergence. The 2 peaks at 02:00 and 08:00 registered RSI 90 and RSI 80.
Entering a SELL at the open of the 10:00 period, and at the -68.6, had a price of 1.2940.
The 2nd chart plots a different FCT to assess the SELL position.
S/L 1.2959 + cushion = 1.2965 (just above 09:00 high)
Entry = 1.2940
TP @ -31.4 = 1.2864 + cushion = 1.2870
Net R/R = 70/25 and ratio of 2.8:1
U.S. data releases at 12:30 and 13:55 GMT complicated timing of this short.
Exiting ahead of 12:30 at the -68.6 gained a net of about 22 pips, resulting in R/R slightly below 1:1.
Terminating the position at just prior to 13:55 data was at about 1.2900. This scenario produced a R/R of 1.6:1.
Otherwise, an experienced trader can opt to tighten stop and trade through data release(s), keeping an eye on the HAMA_T3 zone.
Here is a split screen with one of our previous plots on the right. It has Point C as the horizontal 50% (yellow), as well as sitting on the blue fib channel support.
Chart on the left is the just-posted FCT (Daily time-frame) on the BUY off of Point C..
EUR/USD 4-Hour Chart 2 charts.
A = Sept 10th 20:00 Low
B = Sept 14th 12:00 High
C = Sept 30th 20:00 Low
That plot is on the right, and we can see the FC -68.6 just hit.
2nd Chart, on the upper left, is a 15-min with session colors, MML, and HAMA_T3.
After marking it's pivot low during the Asian session, including the double bottom, price emerged above the HAMA and closed the 05:15 period at 1.2822.
Black fib plot Low = Oct 1st 08:00 1.2866 High = Oct 1st 09:45 1.2909.
Price made a 161.8% extension to the upside (1.2938) and just about at the 8/8th MML to trigger TP 1.2925.
Lower left is a 1-hour with fib plot High = 1.2959 Low = 1.2803. The 78.6% fib = 1.2925.
***
Trading in the direction of the slopes makes certain you have time on your side. Trading opposite the slope means the TP channel target will decrease as time moves ahead. Trading the bounce off of the extensions, when Point C is the extension, is counter to the slope.
A trader will notice certain behavioral patterns. Our observation is that the best zone for the fib channel application is the retrace of A-B should be 68.6, 78.6, or 88.6. The 78.6 being the optimum.
Position Point A to a pivot that makes Point C = 78.6 of AB.
To make the Fib Channel lines extend ahead, go into the parameter tab and check "ray".
Let's pick up where we left off on EUR/USD. The last 1-hour FCT plot saw price touch the 88.6% retrace fib.
Here are the plot points;
A = Sept 28th 09:00 high 1.2959
B = Sept 30th 12:00 low 1.2803
C = Oct 1st 14:00 high 1.2938 (88.6% retrace of AB)
Notice that it also made a hit to the 78.6 (small arrow) of 1.2925 an hour earlier during Oct 1st 13:00 period, and bounced down. In fact, the 12:00 bar's high was also close enough for the SELL entry.
Point C positioned to the 13:00 high was a successful result. However, we need to adjust "on the fly". When price moved up (against this SELL position), and touched the 88.6, we need to move Point C to that location.
If entry was effected at the 78.6, the tightest stop-loss would have been just above the 88.6. The next level would be the 100% fib, or we can use another S&R tool such as MurreyMath1.0.
In this particular example, the 4/8th MML was 1.2939, just one pip higher than the 14:00 pivot high. It was also just about the same as the 88.6 fib of 1.2941.
After repositioning Point C to the 88.6, we saw price decline and hit the -68.6 during the 16:00 period.
S/L = 1.2945 (just above 88.6 including cushion)
Entry = 1.2923 (at the 78.6 minus cushion)
TP = 1.2891 (this was at time of entry, at the -68.6) + cushion = 1.2895
R/R = 32/22 and ratio of 1.5:1
Price met support at the 2/8th MML and the HAMA_T3 zone. It eventually rose past the Plot Line A (PLA), and made an extension to the -131.4 (price of 1.2965). This was also a false breakout of the High.
This simply means the diagonal extension moved 31.4% of the distance between Plot Line A and Plot Line B. The 5/8th MML also there.
Thus, this was a short opportunity to shave a few pips for the experienced trader.
Aside from PLB, the take-profit targets for this short include the fib levels below, as well as the MML levels on the 30-min time-frame. Reducing the time-frame will produce MML levels between the levels seen on the 1-hour chart.
Going to the 30-min will also get the HAMA_T3 zone closer to the current price (see Chart 2) . In fact, price has just bounced off the top of the 16:30 HAMA candle price of 1.2936. We can use this exit as a conservative exit in the review example below.
S/L = 1.2975 (just above MML 1.2970)
Entry = 1.2963
TP = 1.2940
R/R = 23/12 and ratio 1.9:1
Here's the same short, but with another plot using the 2 peaks as points A and C. We switched to a 1-hour view.
A = Oct 1st 14:00 high 1.2938
B = Oct 1st 19:00 low 1.2976
C = Oct 2nd 15:00 high 1.2967
An interesting aspect is that we used a chart with SQ9(Price) with StartPrice of August 2011 high 1.4548 and direction down.
Points A and C are right on a SQ9 level, the 1215 and 1238-degree. Point B is close, with a candle's wick slightly below the 1283-degree.
Price just hit the -68.6 registering 1.2922. From a horizontal point of view, this low is also halfway between the SQ9 1238 and 1260-degree levels.
If the trader made this plot, it could have acted as one of the TP options.
Here are the 2 charts and plots side-by-side. The chart on the right contains the SQ9 plot, and we can see compliance with its levels prior to the short at Point C and the 1215-degree level of 1.2965.
This combined with the diagonal -131.4 to give us 2 reason for the short. The extension itself from the high of 1.2938 was slightly more than 138.2. This tells us that probing above was a courtesy touch of the SQ9 1215-degree.
Point C, therefore, was an approximate 50% extension of AB, which were on SQ9 levels.
** Price has just hit the support trendline of Plot Line A from the first FCT plot. It uses peaks of Sept 28th and Oct 1st.
On the 1-hour time-frame for EUR/USD, plot points for a SELL:
A = Oct 2nd 15:00 high 1.29668
B = Oct 3rd 07:00 low 1.28765
C = Oct 3rd 09:00 high 1.29360
Price declined to the -31.4 during the 12:00 bar, marking a TP price there of 1.28870.
We will notice that the pullback at Point C was not precisely 61.8% nor 68.6% of AB, but in-between.
Now, make the following plot, which is on Chart 2.
1 = Oct 2nd 07:00 low 1.28793
2 = Oct 2nd 15:00 high 1.29668
3 = Oct 3rd 07:00 low 1.28765
This is simply the ABC plot prior to the SELL detailed above. Point 3 was a revisit of the low at Point 1. It probed slightly below. This was a BUY.
The Point C (from SELL plot) was a precise hit to the -31.4 of this plot.
***
This lesson reminds us that while we may have our criteria to trigger, such as waiting for a 78.6 pullback of AB, there can be other observations that would be exceptions to the rule.
It comes with experience. Meanwhile, sticking to strict rules for the beginner is prudent. Money management, as usual, will dictate success.