DayTradingForexwithPricePatternsByLaurentiuDamir

Copyright©2012LaurentiuDamir

Allrightsreserved.Nopartofthisbookmaybereproducedortransmittedinanyformorbyanymeans,electronicormechanical,includingphotocopying,recording,oranyinformationstorageandretrievalsystem,withoutpriorwrittenpermissionoftheAuthor.Yoursupportofauthor’srightsisappreciated.

TableofcontentsAboutthesystemBuyorSell?PricePatternsFlagandPennantRectangleTrianglesSymmetricaltriangleAscendingtriangleDescendingtrianglePricechannelCupwithhandleWedgeEntryandExitStepbyStep

AboutthesystemAverycleanandextremelyprofitabledaytradingsystemthatdoesnotusetechnicalindicatorsofanykind,butonlyconcentratesonreadingthepriceaction.Itfocusesfirstonthebiggerpicturetofindoutwhichofthebuyersandsellersaremorepowerfulatanygiventimeandthenusesthisinformationfordaytradingonsmallertimeframeswiththehelpofverystrongpatternsthatpricemakes.Thisisallyouneed;thisisallthissystemneedsinordertodeliverathousandpipspermonthormore.Beginnertradersoftenthinkthatforachievingsuccessintheforeignexchangemarket,theyhavetoinventsomething,tobeunique,tocomeupwithsomecomplicatedtradingtechniquesthatnooneelsehasthoughtofbefore.Thisisverywrong.Forexisnotaboutuniquenessatall,itisaboutaverylargegroupofpeoplebuyingorsellingatthesametime.Themorepeoplethatbuyorsellatagivenlevelofprice,thegreaterarethechancesofsuccess.Ifyoudevelopauniquestrategyandthenstarttobuyorsellaccordingtoit,thelevelsofpricewhereyoubuy/sellwillbeoverlookedbythemajorityoftradersoutthere,theywillnotdothesamethingyoudidbecausetheydon’tknowyouruniquesystem,andtheydon’tbasetradingdecisionsonit.Inconclusion,youalwayshavetogowiththecrowdnotagainstit;themoreobviousandwellknownthingsarebythepeopleoutthere,thegreaterthechancesofsuccess.Thisisinpartwhatmakesthistradingsystemveryprofitable,itworkswithveryclear,verypopularandeasilyidentifiablepricepatterns.Beingverypopular,mosttraderswatchthemcloselyandtradethemwhentheyfinallybreak.Anotherimportantpartthatmakesthissystemprofitableistrademanagementtechniques,knowinghowtosetandtrailmanuallyyourstoplosslevelsinordertoobtainthemaximumfromeverytrade.Allofthisbeingsaid,letusgodeeperintothecomponentsofthistradingsystem.

BuyorSell?Beforewestartlookingforpricepatternsandlearnhowtobesttradethem,weneedfirsttolookatthebiggerpictureandestablishthedirectionofoutpotentialtrades.Wedonotjusttradeinanydirectionassoonasapatternemergesonasmalltimeframe,wegofirsttoahighertimeframetoseewhoisincontrolatthattime,thebuyerortheseller.Wedothisbygoingtothe4hourschartzoomedouttothemaximumandfindingthemostrecentbigimpulsivemove.Youprobablyalreadyknowthatintheforexmarketoranyotherfinancialmarketthepriceofapairorstockdoesnotgostraight-upordown.Instead,pricemovesinwavesthatconsistofstrongimpulsivemovesinonedirectionfollowedbycorrectivesmallermovesintheoppositedirection.Thesewavesputtogetherformatrend.Letusseeanexampleofimpulsiveandcorrectivemoves:

Intheaboveexamplestartingfromlefttoright,wehavefirstanuptrend.Pricemakesastrongimpulsivemovefollowedbyasmallcorrectionmovethenagainastrongimpulsivemoveupwardsandagainacorrectivesmallmove.Thisrepeatsfourtimes.Ifwehavestrong

correctivesmallmove.Thisrepeatsfourtimes.Ifwehavestrongimpulsivemovesupwardsitmeansthatthedirectionwearelookingforisclearlyupasthetrendisobviouslyup.Everytimewelookatthe4hourschartandweseethatthemostrecentimpulsivemoveisuplikeinthechartabove,weknowthatourpotentialtradeswillonlybeinthedirectionofthatimpulsivemove,meaningwewillonlylooktobuy.Thelogicbehindthisisverysimple.Ifthemostrecentbigmoveisup,thatmeansbuyersarestrongerthanthesellersatthismoment,soitisverylikelythatafterasmallcorrectionmovewheretheytakesomeprofitsoutofthemarket,thebuyerswillstarttopickupthepaceagainanddrivethepricefurtherupwithanotherbigmove.Thatisindeedwhathappenedinthechartaboveandithappened4timesinarow.Afterthis,attheverytopyoucanseethatinsteadofacorrectionsmallmovepricemadeahugemovedownsurpassingthestartofthelastimpulsivemoveup.Thismakesthismovedownanimpulsivemoveaswell,itisnowthemostrecentbigmove;ithasgonebelowthestartofthelastmoveup.Thismeansthedirectionofpricehaschanged,wewillatthispointonlylooktosellifapricepatternoccursonsmallertimeframe.Wethenhaveaverywidecorrectionmovewherepricejustmovesinarange,butaslongasitdoesnotgoupoverthestartofthatimpulsivemovedownitisacorrectionmoveandthedirectionisstilldown.Afterthecorrectionfinallycompletes,wehaveanotherthreeimpulsivemovesdownwiththefirsttwoofthemfollowedbysmallcorrections.Thisclearlytellsusthatdirection/trendisdownandwewillonlybelookingtosell.Withthisdirectioninmindwethengotothesmallertimeframechartandwaitforapatterntoform.Ifthepatternisbrokenontheupside,wedonottradeitasourdirectionisdownandweonlylooktosellatthismoment.AsIsaidbefore,thedirectionortrendonthebiggertimeframeshowsuswhoisincontrol,whichofthebuyersandsellershavemorepowerandconvictiontodrivethepricetonewlevels.Ifthedirectionisup,thatmeansthatthebuyersareincontrol,theyhavewonthewarwiththesellers,theyarethemajorityandtheywilldrivethepriceup.Wegowiththem,withthemajoritybecauseitismucheasiertotradeprofitablethisway.RememberwhatIsaidinthebeginning,themorepeoplethatdothesamethingyoudo,themorechancesofsuccess.Wedonottradeagainstthemajority.Thesamethingappliestothesellersaswell.Letusseeanotherexampleofhowtospotthelastimpulsivemove:

Thingsareclear,wehaveabigmovedown,thisisthemostrecentbigmove,andthesellersareincontrolsowewillonlybelookingtosell.Anotherexample:

Thisisveryclearaswell.Weonlylooktosell.

Herewehavefirsttwoimpulsivemovesdownafterwhichweonlylooktosell,thethirdbigmovegoesallthewayupabovethestartofthepreviousmovesoitisnotacorrection,itbecomesanimpulsivemoveaswell.Welooktobuyasthedirectionhaschanged.Afterthis,wehaveanothertwoimpulsivemovesupfollowedbyanotherchangeindirectionfromuptodownwhenthatlastimpulsivemovedowngoesbellowthestartpointoftheprevious.Thisissimpletodo,justgotoanychartandyouwillseethatyoucaneasilyidentifythelastbigmove.Okay,nowthatweknowhowtoidentifythedirectionofourfuturepotentialtradesletusturnourattentiontothepricepatterns.

PricePatternsTheyareformationsthathappenallthetimeinyourchartsandtheygiveusveryimportantcluesaboutwhatisgoingonbetweenthebuyersandthesellers.Therearetwomajorcategoriesofpatterns:continuationandreversalpatterns.Thereversalpatternssignalthatatrendchangeisabouttohappenwhilethecontinuationpatternssuggestthatthemarketisonlypausingforalittlewhilebeforethecurrenttrendresumes.Asthisisatrendfollowingdaytradingsystem,wewillonlyusethecontinuationpricepatterns.Themostpopularandreliablecontinuationpatternsarethefollowing:flagpattern,pennantpattern,rectanglepattern,symmetricaltriangle,ascendingtriangle,descendingtrianglepatterns,cupwithhandlepattern,thepricechannelpatternandthewedgepattern.Next,wewilldiscussindetaileachandeveryoneofthemsoyouwillhaveaclearunderstandingofhowtomanagethesepatterns.

FlagandPennantThesetwoshort-termcontinuationpatternsareveryfrequentintheforexmarket.Theymarkasmallconsolidationperiodbeforethepreviousmoveresumes.Inorderforthesepatternstobevalidtherehastobeasharpadvanceordeclineprecedingthem.Letusseeanexampleofaflag:

Asyoucanseeinthepictureabove,theflagisarectanglepatternthatslopesagainstthepreviousmove.Theflaginthechartaboveisactuallynotatypicalonebecauseitdevelopssmallhighsandlowsthatyoucanconnectwiththetwoparallellines.Usuallyflagslastforasmallperiodoftimesotheydon’thavetheirownhighsandlowsliketheoneabove.Whenthisisthecase,andyoudonothaveanysmallhighsandlows,youjustneedtoseeifyoucancontainthepricewithintwoparalleltrendlines.Letusseeanotherexample:

Youcanseeintheexampleabovethatifyoucancontainthepricewithinthosetwoparalleltrendlineswithaslopeagainsttheprevioussharpmove,youhaveapattern.Youcanseethatpricespikeddownalittlebitoutofthepatternbutitquicklyrosebackupagainhonoringthepattern.Thisisjustaveryshortspikedown;ifpricecomesbackquicklyinsidethepattern,youcandisregarditeasily.Nowletusfindoutwhatishappeningfromthebuyersandsellerpointofviewwhenthispatternoccurs.Well,asdiscussedbefore,thisflagpatterndoesnotworkunlessitisprecededbyasharpmove.Intheexampleabovethesharpmoveupclearlyshowsusthatthebuyershavetakencontrolofthispairbecausetheymakeastrongimpulsivemoveup.Theactualflagitselfmeansthatthesamebuyersthatdrovethepricesharplyuparestartingtotakeprofitswiththeirbuyorders,theyareclosingpartoftheirbuyorder.Thisisjusthumannature,peoplewanttotakeprofitsfromtimetotimetheydon’tfeelcomfortableholdingtotheirordertheholedaywithoutmakingsurethattheywillmakesomeprofit.Thesellersontheotherhand,whentheflagpatternoccurs,arenotinclinedtosellatthatlevel.Theycanseethatthebuyershavewonthe

inclinedtosellatthatlevel.Theycanseethatthebuyershavewontheshort-termwar;theyknowthatbuyersareverystrongandwilloutnumberthematthislevelsotheyarenotconvincedatalltosellhere.Theyprefertowaitforabetterlevel,ahigherlevelforthemtosell,ahigherlevelwherethebuyerswillnotbeinterestedtobuyanymore.Asyoucansee,aftertheflagthebuyersdrovethepricesharplyupagain.Ok,letusmoveontothepennantpattern.Thepennantsharesthesamecharacteristicswiththeflagpatternexceptfortheshape.Itisasmallsymmetricaltrianglethatbeginswideandconvergesasthepatternmatures.Theslopeofthepatternsshouldbeneutral.Letusseeanexample:

Wehaveasharpdeclinefollowedbyapennantpatternafterwhichthesellerspushthepricefurtherdown.Likewiththeflag,thepennantisshortindurationsoitusuallydoesnotformitsownhighsandlows,inthiscaseyoujusthavetocontainthepricewithintwoconvergingtrendlineswithaneutralslope.Thelogicbehindthepatternisthesameaswiththeflag.Thesellersstarttotakeprofitsafterthatsharpdecline,thebuyersknowthatthesellersarestrongandwillpushthepricedownsotheystayoutatthatlevel.Thedifferenceinshapeisgivenbythedynamicsofthe

outatthatlevel.Thedifferenceinshapeisgivenbythedynamicsoftheprofittakingbythesellers.Ifwiththeflagpattern,thepricegoessmoothandslowlyagainstthepreviousmove,suggestingtradersareonlytakingsmallprofits,inthecaseofthepennant,wehaveamoreaggressiveprofittakinghencetheshapeofthepattern.

RectangleTherectangleisacommoncontinuationpatternthatsignifiespriceisconsolidatingbeforeresumingthetrend.Pricegoesupanddowninatightrangeforminghighsandlows.Thehighscanbeconnectedwithahorizontalline;thelowscanbeconnectedwithahorizontalline.Letusseeanexample:

Youcanseethatafterasharpmoveuppricestartedtoconsolidatebeforeresumingthepreviousmove.Ittradesinarange,makesshortupanddownmovescreatinghighsandlowsthatyoucanconnectwithhorizontallines.Forarectanglepatterntobevalid,ithastohaveatleasttwohighsandatleasttwolows.Therectangleintheabovecharthastwolowsandthreehighs.Itisarectangleindeed.Asthisisacontinuationpatternandweonlytradewithpatternslikethisthatsignalthatthetrendisabouttoresumeweonlyexpectforabreakofthepatterninthedirectionofthelastimpulsivemoveonthe4hchart.Ifinthiscase,thelastimpulsivemovehadbeendown,wewouldhavehadtodisregardthispatternbecauseitbreaksontheupside;itisnotinlinewiththe4hchart.Letusseeanotherexample:

Herewehavetwohighsandthreelows,andwehavealsoalittlespiketotheupside.AsIsaidbefore,thisisnotsomethingyoucanworryabout,forexisnotexactscience,andthepatternsrarelydolooklikeintextbooks.Aslongasthepricequicklyretracesbackinsidethepatternandtherespectsagainthefirsthighcreatingahorizontalresistancelineasitdidinthischart,thingsaremorethanokay.Thelogicbehindthispatternisthefollowing.Buyersandsellersstarttoplaysomeping-pongwiththeprice.Theyhaveequalforces;thereisgreatequilibriumbetweenthem.Inthisexamplebuyersmakeastrongmoveupafterwhichtheystarttotakesomeprofits.Atthistimesellersarebeginningtoshowinterestsothesellmakingthefirsthighofthepattern,whenpricegetslowerbuyersthinkit’stimetoresumethepreviousmovesothepushthepriceup,buttheydon’thaveenoughforcetopushitabovethelevelwherethesellerhaveshowninterestlasttime.Atthatlevelthesellercomeinagainandpushthepricebackdowncreatingthesecondhighofthepattern.Thisgoesonuntilonesidegivesinandthatiswhenthepricepattern

Thisgoesonuntilonesidegivesinandthatiswhenthepricepatternbreaksinonedirectionortheother.Itisasimplepattern,buyersandsellersareatwar,andnobodyiswinning.Wejustsittightandhopethatthepatternbrakesinourpredetermineddirectionofpotentialtrades.

TrianglesTherearethreetypesoftrianglepatterns,symmetrical,ascending,anddescending.Symmetricaltriangle:thisisacontinuationpatternthatcontainsatleasttwohigherlowsandtwolowerhighs.Whenyouconnectthehigherlowsandthelowerhighs,youobtaintwotrendlinesthatconverge.Letusseeanexample:

Inthissymmetricaltriangle,wehavetwolowerhighsandthreehigherlows.Theimpulsivemoveonthe4hchartwaspointingup;pricemakesacontinuationpatternonthesmallertimeframeandthenresumesthepriormove.Asyoucansee,itisquitesimilarinshapewiththepennantpatterndiscussedearlierbutthissymmetricaltriangletakesmoretimetoform,hastohavelowerhighsandhigherlows,anddoesnothavetobeprecededbyasharpmovelikethepennantpattern.Anotherexample:

Inthisexample,wehavethreehigherlowsandthreelowerhighs.Pricemakesanimpulsivemoveuponthe4hchart,thenasymmetricaltriangleoccursonthesmallertimeframe(thetimeframeintheabovechart),patternbreaksandcontinuesthetrendup.Thelogicbehindthispatternisthis:thebuyerspushthepriceupmakinghigherlowsbutatthesametime,thesellerspushthepricedownmakinglowerhighs.Thisnarrowingtradingrangecanonlymeanthatthebuyersandthesellersarelosinginterestinthatpricelevel.Asyoucansee,thepatternstartswideanditbeginstonarrowwhenapproachingitsend.Whenthetradingrangewherethebattleofbuyersandsellerstakesplacebeginstonarrowthisalwaysmeansthatabigsharpmoveineitherdirectionisabouttoemergeafterthebreakofthepattern.Thisnarrowingmeanslowvolumeofordersinthemarketatthatlevel;thebuyerconsidersthatthepricelevelisunattractiveforhimtobuy.Thesellerthinksthatthelevelisunattractiveforhimtosell.However,whenpricebreaksoutofthatsmallrange,thepricestartstomovefastinonedirectionoranother.Ascendingtriangle:thisisabullishcontinuationpattern.Itmusthaveatleasttwohighsandtwolowsthatyoucanconnectwithtrendlines.The

uppertrendlinemustbehorizontal;thelowertrendlinemustbeadiagonalonelikeinthechartbelow:

Thisbeingabullishpatternwemustmakesurefirstthatthemostrecentimpulsivemoveonthe4hchartisalsoabullishone.Youcanseewehavetwohighsandthreelowshere,patternbreaksontheupsideasexpected.Hereisanotherascendingtriangle:

Herewehaveanotherexampleofhowwellthispatternperforms.Thelogicbehindthispatternisobviousandyouhaveprobablyfigureditout.Thesellersarenotlettinggoeasilyofthatlevelwherethehorizontaltrendlineis,butthebuyersareverypersistentandtheystarttopushthepricehigherandhighermakinghigherlows.Eventually,thesellerswilladmitdefeatandstopenteringsellordersatthathorizontalline.Theywillhavenochoicebecauseeverytimetheysellthebuyerspushthepricebackuptowheretheysoldandtriggertheirstoplosses.Thesellersareoutnumbered;thebuyershaveclearcontrol.Afterthat,thepatternbreaksandthebuyersresumethetrendestablishedbythatpreviousimpulsivemoveup.Descendingtriangle:thispatternisprettymuchtheoppositeoftheascendingtriangle.Itisabearishcontinuationpatternmeaningthetrendisdown,pricestopsforawhiletoconsolidateformingadescendingtrianglepatternandthenitgoesfurtherdownresumingthetrend.Hereisanexample:

Thereisaminimumrequirementoftwohighsandtwolowswiththispatternaswell.Thelogicbehinditmirrorstheonefromtheascendingtriangle.Thesellersarethemajority,thetrendisdown,thebuyersholdtheirgroundatthehorizontaltrendlinebutonlyforashortperiodoftime.Thesellerswinandtheybreakthepatterntocontinuethetrenddownwards.

PricechannelThepricechannelisalsoacontinuationpatternthatconsistsoftwoparalleltrendlines,oneaboveandonebelowthepricethattaketheshapeofachannel.Ifthechannelisslopingupwardsthenitisabullishpattern,ifthechannelisslopingdownwardsthenitisabearishcontinuationpattern.Likealltheotherpatterns,eachtrendlinemustbedrawnconnectingatleasttwohighandtwolows.Letusseeanexampleofthispattern:

Thispricechannelisslopingupwardssoitisabullishcontinuationpattern.Thelastimpulsivemoveonthe4hchartshouldbeupforyoutoconsidertradingthispatternwhenitbreakstotheupsideresumingthetrend.

Inthisexample,wehaveabearishpricechannelpatternbecauseitsslopepointsdownwards.Wealsohaveadowntrendinplacebecausewefoundonthe4hchartthatrecentimpulsivemovedown.Thelogicbehindthepricechannelpatternisthefollowing:whenthetrendinup,thebuyersareincontrol,pricestopstoconsolidatewhentheydecidetotakesomeprofitsoutofthemarketbutthesellersarenowheretobefound.Theydon’tevenhavethestrengthtocorrectthetrend,tomakeasmallcorrectionmoveagainstthetrenddirectionsopricejusttricklesupwardsslowlyformingachannelbeforethebuyersstarttoresumethestrongtrendbybreakingthisslowmovingpatternandcontinuingthemoveup.Thesamethingappliesforthebearishpricechannelbuttherolesarechangedbetweenthebuyersandthesellers.

CupwithhandleThisisacontinuationpatternaswellandasthenamesays,ittakestheformofacupwithasmallhandle.LetusseewhatIamtalkingabout:

Thispatternalsohastohaveatleasttwohighsorlowsthatyoucanconnectwithahorizontallinelikeinthechartabove.Youcanseethatthetrendisup,thispatternformsinacorrectionofthetrendbutitisnoordinarylookingcorrection.Itisintheformofacup;pricegoesslowlydownandthenreversesjustasslowlyformingacupshape.Whenitgetsbackuptowherethecorrectionstartedpricemakesanotherformationagainstthetrendthatresemblesahandle.Itusuallylookslikeaflagpatternonitsownbutwhenputtogetherwiththecupitformsthecupwithhandlecontinuationpattern.Thelogicbehinditisthatthebuyers,inthiscase,havedriventhepriceupforalongperiodoftimemakingabiguptrendandnow,atthelevelwherethepatternformed,theydecideit’stimetoscaledownabigpartoftheirordersandtakesomewell-deservedprofits.Butbecausetheuptrendwassobigthatmeansthattherewere

muchmorebuyersthanusualtopushthepriceupforthatlongperiodoftimesonowtherearealsomuchmorebuyersthathavetotakeprofitssothecorrectionmoveisalsolonginduration.Becauseitislonginduration,thesellershavetimetogathertheirforces.Thefirstpartofthecupisaclassiccorrectionthatlooksalmostlikeaflagpattern.Afterthat,whenthebuyersdecidethatitistimetopushthepricebackuptoresumethetrend,theyfacequiteastrongresistancefromthemoreandmoresellersandtheycanonlypushthepriceupslowlyformingthecup.Afterthepricecomesbackuptowherethecorrectionstartedatthatredline,thesellerknowthatthislevelistheirterritoryasthesoldtherebeforesotheyjoinforcesandsellthereagain.Themovedowndoesnotlastlongandthesellershavetoadmitdefeatasthebuyersawakewithconvictiontocontinuethetrend.

WedgeThewedgecanbeacontinuationpatternandareversalpatternbutwewillfocusonlyonthewedgeasacontinuationpatternasweseektotradeonlywiththemaintrend.Acontinuationwedgepatternisalwayssituatedinthecorrectionmoveagainstthetrendorlastimpulsivemove.Likeallotherpatternsishastohaveatleasttwohighsandtwolows.Acontinuationwedgepatternthatformsinanuptrendiscalledafallingwedge;acontinuationwedgepatternthatformsinadowntrendiscalledarisingwedge.Theslopeofthewedgepatternalwayshastobeagainstthemaintrendoragainstthedirectionthatwelooktotradein.Inaddition,thetwotrendlineshavetoconverge.Letusseeachartwithsuchapattern:

Wehaveacleardowntrendestablishedbythat4hchartlastimpulsivemove.Thetrendentersacorrectionfazeandarisingwedgeisformed.Yes,Iknow,itlookslikeasymmetricaltrianglebutitisnot.Thesymmetricaltrianglehasaneutralbias,thisrisingwedgealwayshasanupwardsslopeandisvalidonlyindowntrends.Letusseeafallingwedgeaswell:

Wehaveanuptrend,priceenterscorrectionfaze,afallingwedgetakesshape.Thelogicbehindthesewedgepatternsisprettymuchthatofthesymmetricaltriangleexceptthatherewehaveabias.Intheexampleabove,thebuyersstarttotakeprofitsandacorrectionmoveagainstthetrenddevelops.Thetradingrangestartstonarrowwhichsignalsthatthebuyerswillsoonbreakthepatterntotheupsideandresumethetrend.Likewiththesymmetricaltriangle,thispatternusuallyresultsissomeprettystrongmovesbutthereisadifferencewhichmakesthispatternevenstronger.Thesymmetricaltrianglehasnoslope,nobias,butinacorrectionmoveagainstthetrend,theshort-termbiasagainstthetrendisagoodthingforthehealthofthetrend,itmeansthatthepeoplewhodrovethepriceupordownaretakingprofitsandtheywillcontinuethetrendfurther.Nobiasagainstthetrendorneutralbiasmeansthatthesamepeopledidnottakeenoughprofitsatthatlevelandtheymightstarttotakethemlater,whichimpliesthatthetrendwillnotcontinueverystrongly,orsharply.Hereissomethingimportantforyoutoconsiderwhentradingpatterns.Theydevelopinthecorrectionphaseofatrend

whentradingpatterns.TheydevelopinthecorrectionphaseofatrendandthesecorrectionmovesusuallyrespecttheFibonacciretracementlevels.Notalways,butveryoftentheydo.Itiswisethatbeforeconsideringtradingapattern,tomakesurethatthecorrectionalmovethatisinfactthepatternitselfhasretracedatleasttothe38.2%Fibonacciretracementleveloftheimpulsivemove.HereiswhatImean:

Herewehaveabigimpulsivemoveupafterwhichthecorrectionretracesexactlytothe38.2%level.Thisisagoodcorrectionandiftherehadbeenapatternthere,thiswouldhavebeenagoodtrade.Theideabehindthisistogiveyouaguidelinewhentradingthebreakofapattern.Ifapatternformsearlyinthecorrectionmoveitcouldnotbeagoodpatternbecausethecorrectionisnotcompleteandthepricecanverywellbreakthepatterninyourdesireddirectiononlytoreverse,hityourstoplossandcontinuethecorrectionmoveatleasttothe38.2%Fibonacciretracementlevel.ThisiswhyIrecommendtoyouthatifyouseeapatternthatyouthinkisgoingtobreakinthedirectionyouareexpecting,firstdrawtheFibonacciretracementstoolontheimpulsivemovetoseeifthecorrectionisbigenough.

EntryandExitNowthatwehavelearnedaboutimpulsivemovesandaboutallthepricepatternsitistimetolearnabouthowwecantradethesepatternswhentheyoccur,howtoenterinatradeandhowtomanagethetradesothatwecanobtainamaximumprofit.Letusseesometradeexamples:

Herewehaveaflagpattern.Thelastimpulsivemoveonthe4hchartwasdownsowegotothe30minuteschart(thischartabove)andwaitforacontinuationpatterntoform.Afteritforms,wewaitforittobreakinthedirectionofourimpulsivemove.Inthiscase,weseektosellsowewanttheflagtobreakonthedownside.WhenIsaybreakImeanforyoutozoomoutthe30minuteschartandwaitfora30minutescandletocloseoutside,belowtheflagpattern.Afterthishappens,youzoomoutthe30minuteschartandwaitforthepricetogobackuptotheredlowertrendlineandretestitorgetclosetoit.Thislineisnowaresistancelineandoftenafterapatternbrakes,pricecomesbackshortlytoretestitlikeinthechartabove.Wehadabreakoftheflagtothedownside;pricerosebackuptoretestthelowertrendlineandthencontinueditswaydownresumingthetrend.Weenterthesellstoporderatthelevelwherethepricestartedtorisebackupandretestthelowertrendlineoftheflag.

pricestartedtorisebackupandretestthelowertrendlineoftheflag.Thestoplossisplacedatthelevelwheretheretestofthetrendlinetookplaceasshownintheabovechartexample.Nowletusseehowwemanagethestoplosslevel:

Thisisthesame30minuteschartandthesametrade.Aspricebeginstomoveawayfromtheflagpatternitstartstomakesmalllowerhighs.Wetrailmanuallyourstoplossleveljustabovethoselowerhighs.Letmetellyousomethingsaboutthetradeentrylevel.Wehavetwowaystoenterthetrade.Thefirstistowaitfortheretestofthepatternlikeintheexampleabove;thesecondistoenterwhena30minutescandle’sbodyiscompletelyoutsidethepatterniftheretestdidnothappenrightafterthefirstcandlethanclosedoutsideit.Thisisbecausetherewillbetimeswhenthetrendistostrongandtheretestneverhappens.Letusseeachart:

Herewehaveadescendingtriangleinacleardowntrendwiththerecentimpulsivemoveonthe4hchartdown.Thepatternbrakestothedownside,aswewantittobreakbutafterthefirst30minutescandlethatclosesoutsidethepatternthereisnoretestofthelowertrendline.Ifthereisnoretestafterthefirstcandlethatbreaksthepattern,weenteratthecloseofthesecondcandlethatiscompletelyoutsidethepattern.Youshouldnotwaitfortheretest,ifitdidnothappenafterthefirstcandlethereisagoodchancethatitwillnothappenatall.Weplacethestoplossabovethelastminorlowerhighinsidethepattern.Thenwetrailthestoplossmanuallyexactlythesamewayasinthefirstexamplewhereweenteredtheorderaftertheretestofthepattern.

Herewehavethesamesituation.Wehaveanascendingtriangle,mostrecentimpulsivemoveonthe4hchartispointingup,butafterthefirstcandlethatclosesabovethepatternthereisnoretest,soweenterthetradeatthecloseofthesecondcandle,whichiscompletelyoutsidethepattern.Wedonotwanttomissagoodopportunitytomakesomepipsbywaitingforaretestthatwillnevercome.

Herewehavearectanglepattern.Afterthebreakcandlethatclosesoutsidethepattern,theretestbegins.Weenterwhenpricecomesbackdownatthecloseofthebreakoutcandle,andwesetoutstoplosswheretheretestfinishedandpricestartedtogodownawayfromthepattern.Now,aboutexits,Ihavealreadytoldyouthatyouhavetotrailmanuallythestoplossjustabovethelowerhighsonthe30minuteschartwhenyouaresellingorjustbelowthehigherlowsifyouarebuying.Thesearelogicalturningpointsinthemarket,theyaretheleastprobablelevelsforthepricetotouchwhenthereisastrongdirectionthereforetheyareaverygoodplacetohangyourstoploss.However,thereisanotherwaytoexitatradeearlierthanthisandyoushoulduseitifthemarketofferstheopportunity.WhenIdiscussedaboutthewedgepattern,Itoldyouthatthispatterncanbeacontinuationpatternbutitalsocanbeareversalpattern.Itverymuchdependsofitslocation.Ifitformsinthecorrectionphaseofthebigtrendonthe4hchartanditisslopingagainstthistrendthenitisacontinuationpatternandweuseitasdescribedabovetoentertrades.Thispatterncanalsoemergeintheimpulsivemovesofthetrendsignalingthatthetrendisabouttoend.Theslopeshouldbeinlinewiththetrend.Letusseeachart:

end.Theslopeshouldbeinlinewiththetrend.Letusseeachart:

Hereisanuptrendthatfinisheswithareversalwedgepattern.Ifyouareinatradeandyouseethispatternemergingyoukeepaneyeonittoseeifitbreakscounterthetrendtoconfirmthatthetrendisatitsend.Ofcourse,themainapproachfortradeexitsremainsthemanualtrailingbeloworabovelogicalpoints.Nevertheless,ifyouseeawedgethatbreakstothedownsideifinanuptrendortotheupsideifinadowntrend,thenyoushouldexitwhenthispatternbreaks,whena30minutescandleclosesoutsideofittoconfirmthatthetrendisending.Thisgivesyouabetterexitlevelasyoudonothavetowaituntilpricegoesbacktothelasthighorlowtohityourstoplevelandeatawayasmallpartofyourprofit.

StepbyStepHereisthesystemfromachronologicalpointofview.-Gotothe4hourschartzoomedouttothemaximumandfindthemostrecentimpulsivemove-Gotothe30minuteschartandlookforpatternslikethoseexplainedearlierinthisbook.Ifapatternemerges,youwaitforabreakoutinthesamedirectionastheimpulsivemoveonthe4hchart.Ifthebreakoutofthepatternisnotinthesamedirectionasthatoftheimpulsivemove,donottradeit.Gotothenextchartorpairanddothesame.-Ifthebreakoutdirectionofthepatternisinlinewiththatoftheimpulsivemove,enterthetradelikeshownintheentryandexitsection.Trailmanuallyyourstoplossunderoraboveeveryminorhigherloworlowerhigh,thatpricemakesonthe30minuteschart.Thisisaboutit.IntheendIwouldliketoapologizeifIsoundalittletorigidinmyexplanationsandifthereareanymisspellings.Englishisnotmyfirstlanguage.IamdoingthebestIcan.IfyoufindthatthisaddsvaluetoyourtradingpleaseconsiderwritingareviewofthebookonAmazon.Itdoesnothavetobelong,justafewwordstostateyouropinionaboutthetradingsystempresentedinordertohelpotherpeoplemakemoreinformeddecisions.Pleaseemailmeafterwardsatdamirlaurentiu@yahoo.comandyouwillreceivethePDFversionofthise-booksothatyoucanreaditmoreeasilyandprintthecontentsonpaperifyouwant.DayTradingForexwithPricePatternsThankyouverymuch.Inaddition,ifyouwanttocombinethistradingsystemwithotherpowerful

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