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sabato 31 marzo 2018

Learn Forex Trading: Short Term Patterns

Forex trading
Short-term patterns focus on individual bars, noting how high or low a bar is in addition to where the opening and closing prices are. Short-term patterns occur very commonly. The basis for using short-term patterns in trading is to catch quick, sudden moves, such as when a pullback to a broken trend line occurs.
Short-term patterns occur very frequently and are prone to delivering false signals. It is therefore imperative that the trader must identify the previous trend before using them. It also helps if the price is at a support or resistance area or a trend line. Many short term patterns are reversal patterns, but in a strong trend, they may signal continuation.
How Short Term Patterns are Formed
From the opening statement of this article, we can deduce that short term patterns principally make use of the open, close, high, and low prices, irrespective of whether the patterns are of the traditional chart variety or are candlestick patterns. In terms of importance, the closing price is considered more important than the open price, as it can be used to form a basis for the next day’s trade decision. For instance, if a trader wants to trade a breakout, the price at which the candle closes is what is used to consider if the breakout from a key level has occurred. The closing price ends the activity for the day and allows the trader to examine the candlestick to see what it is saying.
The open price is usually formed as a result of initial market response to a previous event, and is not considered a good gauge of what the eventual market reaction would look like. This is why most professional traders do not base decisions on the open price.
What about the high and low prices? Buying activity forms the high, while selling activity is responsible for the low prices. In examining a candle, the trader must look out for the following:

  • Bar length: Long bars indicate strong moves.
  • Length of the shadows: Shadows form as a result of blowback from traders on the opposing end. Long shadows indicate that there is a lot of resistance to a price move initiated by traders on one side.
  • Position on the bar
  • Previous bar’s data,
  • Price distance

  • All patterns mentioned here do not use indicators which are reliable in the short term.
    Gaps are formed when there is an obvious space between the current candle’s open price and the precious candle’s high price, or when there is a space between the current candle’s low and the high for the previous bar. The space or hole that forms is known as the gap.
    Runaway gap
    Runaway gap
    Gaps are more commonly seen in the stock market than in forex, because the stock market is not a 24 hour market. A lot can happen in the after-hours. So whereas a 24 hour market like the forex market will absorb such events easily and smooth them out within the price candles, a market with a break between sessions will respond with a gap.
    Gaps are of three types:

  • Breakout gaps
  • Runaway gaps
  • Exhaustion gaps

  • Breakaway gaps: These occur at the start of a trend. A typical example of when this happens is when price breaks out of a formation to signal the start of a new trend. The size of the gap (in pips) usually corresponds to the same pip distance of the eventual move. By definition, price continues in the direction of the gap. The upside gaps typically come with heavy volume; downside gaps do not necessarily have heavy volume.
    Runaway Gaps: These are gaps occurring along a trend. They are also called measuring gaps. The snapshot above is a clear example of a runaway gap. Here, the trend just keeps on going following the gap with virtually no corrective activity. Again, gap distance seems to determine the profit target distance from the entry point above the gap.
    Exhaustion Gaps: They occur when a trend is exhausted. These are the gaps that are most likely to close as a result of reversal price action. They resemble runaway gaps, but the difference is that they are filled immediately they form. Also, runaway gaps occur in the middle of a trend (compress the chart with the zoom tool and check where prices have topped or bottomed out previously to know whether the gap is in the middle of a trend).
    Trading with the trend has long been shown to be the best approach to trading. However, not every trader will catch a trend early. Some will come to the party late. For these ones, the trend correction patterns are the way to go.
    Two types of trend correction patterns are described.

  • %age pullback patterns, where traders decide to wait until the trend has undergone a certain percentage retracement before entering into the trend. A Fibonacci retracement entry works in this manner.
  • The Landry method, also called the knockout, which requires the presence of a very strong trend to work.

  • Landry proposed a system where a trend line had to touch all the highs of the price action in an uptrend. This would require the use of an SD line. Once the asset presents a pullback within 2-5 trading days, and previous lows are exceeded, a Buy Stop is set at the high of the bar with the 2nd low is placed. Set your SL below the last low.
    The shark-32 pattern gets its name from the fin shape of this three-bar pattern. According to the setup rules, three candles must form, with day 2 and day 3 candles forming successively lower highs and successively higher lows.
    Day 1 candle -> Day 2 candle (inside bar of day 1) -> Day 3 candle (inside bar of day 2)
    Day 1 candle -> Day 2 candle (inside bar of day 1) -> Day 3 candle (inside bar of day 2)
    When the line tool is used to connect the highs and lows, a triangle shape is formed, which looks more like a pennant or the dorsal fin of a shark, hence the name of the pattern.
    The two-bar breakout is best used for commodities. The rules are very simple.

  • For long trades, set a Buy Stop at one tick higher than the current day’s high if the current candle forms lower lows and lower highs than the previous day’s candle, and also if the closing price of the current candle is lower than the open price. The exit stop is set at the current candle’s low price.
  • The reverse setup is used for short trades.

  • The reverse setup is used for short trades
    The inside bar is a two-bar formation where the body of the day 2 candle is contained within the range of the body of the day 1 candle. That is, the day 2 candle has a lower opening price and a higher closing price than the day 1 candle.
    inside BAR
    This pattern signifies a drop in momentum and is therefore significant only at the tops or bottoms of price action. This is one example of a pattern where position of the pattern is of paramount importance. The pattern has to be confirmed by a 3rd candle’s orientation before a trade can be initiated.
    There are many more of such short term patterns. However, these ones represent some of the commonly seen short term patterns which traders can use in their everyday trading activity.

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