This chart sums up the way some RTM members scalp the lower time frame charts for huge R:R trades with a decent hit rate, and will be the focus of my demoing moving forward. Important points are that price has to be at a higher time frame Supply/Demand level and it has to engulf a previous supply/demand level as a form of price confirmation. Notice how tight the stop loss can be and how it is possible to catch the precise top? This is the key to high R:R trades. That sharp move down for a 5:1 trade is super rare on the daily and above charts but it is common on the lower time frames. This is why I'm beginning to feel the key to huge and fast account growth if one only has a small account is to be real good at scalping the lower time frames.
The main reason why people shun away from lower time frames is because of the seeming noise and spikes that could easily stop one out. PA bars also have a much lower success rate. However, I believe this is due to a lack of knowledge, it certainly is for my case. Price moves according to the chart above, and the engulf is like a secret signal to the pros of where price wants to go next. Once we get that engulf, it is unlikely that price will stop you out even with such a tight stop because those in the know would want to jump in on the next move and they'll loading up as much as possible at that level before price takes off.
Acronyms:
DD: Draw Down
HTF - Higher Time Frame
RBD - Rally Base Drop (A rally in price followed by a small consolidation and a drop, this establishes a supply level)
R:R - Reward:Risk
Hi Myst, that chart is an excellent model for a great trade.
ReplyDeleteJust to clarify something for me? The (2) level that you marked is engulfed by the candle to the right of that line, correct?
So what is that engulf telling you? Is it that it won't act as S&D level in the future?
Hi Steve, that chart is actually taken from Infest's journal post #30. Yes you're right about the candle that engulfed (2). Here is my personal interpretation of an engulf based on what I've heard and read so far: For an engulf to happen requires huge amount of money, like billions. The big money will only do this because they want price to go further in the direction of the engulf. In the above example, a lot of money has to be pumped in to overcome the demand level at (2). When this happens, that demand level is no longer valid as all the buy orders there have been consumed. It is a sign that price wants to get lower. Why then does price have to return to the origin of the engulf? I believe the reason is twofold (personal interpretation):
Deletea) Notice that the engulf also happened to be a fake break down? This traps early bears/breakout shorts as well as shakes out weak bulls. Their stop orders provide the liquidity for the pros to take profits on their earlier short orders taken at the RBD level and perhaps open some short term long positions.
b) The pro money are a greedy bunch. They want to accumulate even more short orders before the actual move down. As price is rallying back to the RBD level, more and more retailer bulls are sucked in as they believe that the uptrend will continue. Again their buying provides the liquidity for the pro money to take profits on their earlier short term long positions as well as initiate even more shorts.
Not sure if that makes sense, but I believe the key here is not just the engulf but the fact that all this is happening at a HTF Supply level. Without that this setup will not be valid as engulfs happen everywhere and we certainly do not want to be taking all of them.
Here is a quote from SunnyTrader: "I definitely feel, ENGULFING is a hidden signal which the professional traders use to send to each other telling them, lets get together and screw the retailers."
That is probably the best explanation of engulfs that I have seen. I have learned how to recognize them but up until now I really wasn't sure what to expect from one.
ReplyDeleteThank you!