Accumulation Pattern And USDCHF

I like to study and save charts of repeating patterns I observed with the belief that over time I'll get better at spotting them and anticipating a move. Here is an accumulation pattern that I've noticed many times. Again I don't know what to call it. The pattern formation goes something like this:

1. Huge spike down - Selling climax in VSA?
2. Price subsequently tries to make 1 or 2 more stabs down but fails to make significant lower lows. This indicates a weakening in selling pressure and often shows up as bullish divergence. The stabs down might also stop hunt previous swing lows, allowing pro money to load up longs.
3. Price then breaks out of the pattern

Here are some chart examples:

It would be good if this pattern takes place at a HTF demand zone. It is also similar to a falling wedge pattern.

And now... I think I'm seeing something similar on USDCHF H1. It is still a small distance over a significant demand zone (blue area) so I won't be surprised if it takes another stab down into the zone first.

USDCHF H1

And here is the anti climax -  I don't know how to trade this pattern! I guess some ideas might be to trade PA bars at the 2nd or 3rd stab down (aggressive), or trade the breakout (in which case I don't know where to put the stop). 

Just something which I thought might be interesting!

Double Top With Compression Pattern

I've been going through charts and filing patterns which I've noticed repeatedly. It is so fun to do so and helps increases my confidence in them. In this post I want to share another powerful pattern. It is some what like a double top, but the defining factor is that there is compression prior to the second top, and the second top is often into a supply zone. A bearish divergence is also almost certain. Here are some charts:

This is similar to the CP + LS pattern - compression followed by a liquidity spike. In this context, price first forms a first top. It then drops and slowly compresses up. This compression is the pro money's attempt to remove buy orders so that the subsequent move down is unopposed. After the compression, price spikes up. This stops out early shorts as well as traps breakout longs, providing liquidity for the pro money to go short. A huge reversal then happens. The way to trade this is to wait for a candlestick pattern or rejection wicks at the supply zone where the second top is occurring. More aggressive traders can just take a touch trade at the zone with a stop above.

New Chart Pattern - Last Breath Pattern

I think I've discovered a new chart pattern. I hate thinking of names so I shall call it the Last Breath Pattern for now. I seriously don't even know what the logic behind it is and why it works, but I've seen it so many times to know it is not a fluke. The pattern basically starts off with a compression like up move which then curves down a little and shoots up as if taking its last breath. It finally drops back down rapidly and breaks the origin of the final spike up.

This is going to sound stupid but I don't know how to trade this pattern. You can't short at the top because you don't know whether it'll spike back down or not, and you can't short the support break because you don't know whether it'll be a genuine break or not (yes it does false break and go higher too). This pattern only gives a high probability that the support will break, it doesn't guarantee that the break will follow through. :P

There is one use for the pattern though - Avoid going long when price is returning to the origin of the spike up. You see, I managed to discover this pattern because I fell for it many times by going long at the origin of the spike up and getting stopped out. After some time I can't help but find it familiar. I'm happy to say that in the past two days, I've avoided two losing trades simply because I remembered this pattern. Every other trading rule of mine stated that those trades were valid but I just couldn't pull the trigger as something "didn't look right". Well that discomfort saved me 2R and I am even more convinced that there is something going on behind the scene of this pattern. Maybe I should add this to my trading rules - Do not trade if there is a Last Breath Pattern. :P

AUDUSD confluence with the AUD crosses

Just want to write a short post to describe a form of confluence that could aid an analysis. In this example, we can observe nice H1 zones across the various AUD pairs. This means that if price should retrace, there is a high chance they'll hit their respective zones around the same time, hence acting as a form of confluence for any AUD related trade.

At first glance one might wonder duh doesn't this always happen? Well it doesn't. Sometimes we could see AUDUSD rising strong and forming a nice Demand zone, but the rise could be due to Dollar weakness. In this case, It is likely that pairs such as EURUSD , GBPUSD, NZDUSD would also be rising and USDJPY could be dropping. What we have then is a muted reaction on the various cross pairs.

In this case we have clear zones formed across all the AUD crosses and even on AUDNZD (NZDUSD is highly correlated to AUDUSD, so for a strong zone to form here is pretty rare). This is a sign of clear AUDUSD strength which was a result of the positive morning AUD GDP news. The idea then is to pick the best looking AUD pair to trade. I've personally chozen AUDNZD as I think it has the nicest price structure and most space to move. We will not want to enter multiple trades on the various AUD pairs as that would result in excessive losses should all the trades fail.

August Trading Result + Brief Summary Of Trading Method

So finally I hit double digit % monthly return, though its only on a demo account. The following account was created at the start of Aug and here are the results after 1 month.

That amounts to about a 10% gain which is still far from my target (30%), but its the best I've achieved so far and we should celebrate little successes shouldn't we? :P Btw do ignore the win rate, it should be higher than that. I have a separate scalping account but due to carelessness I keep mistakenly entering trades on this account instead (about 3 or 4 such trades) and end up having to immediately close them for a small loss. Definitely not a mistake I want to make on a live account.

So anyway, the main point of this post is to describe a trading strategy which I'm totally convinced is highly profitable. The above result is based on this strategy, but I got distracted along the way and tried out lots of other stuff (especially scalping) and as a result missed out on many potential trades. I'm going to stick my neck out and say this - I honestly believe that this strategy when executed properly with a 2% risk per trade could possibly net 50% or more monthly. The strategy itself is simple, the psychology is not. And that is my biggest problem.

Ok back to the strategy, obviously it is too much to describe on a single post, but this FF thread by Alfonso has detailed description and videos on it. Initially I was skeptical of him because of all the fancy indicators, but damn he has got the concept nailed. Do not think it is anything new, it is pure supply demand concepts, it is Sam Seiden, it is ReadTheMarket, it is Kenneth Lee. The difference is this, he has ingeniously managed to tie everything in and create a very conservative rule based system. What I really like about him is that he pays huge attention to the higher time frames. A lot of S/D traders don't and end up getting killed.

I do not exactly follow Alfonso's rules but the core logic is this: wait for a trend to be established by the creation of new zones which engulfs an opposing zone, and then touch trade a retracement to that zone. In layman's terms we're trading a breakout pullback. Here are some example screenshots:

EURJPY M30

AUDCAD H1

GBPAUD H1

The secret to this strategy is this: super low risk, and as such freaking good RR. The initial stop would be placed just behind the zone of interest. I personally would then trail my stop beyond each newly created zone. Based on this, the EURJPY trade itself could potentially have netted 10R. 2% per trade = 20% on one trade. Needless to say I missed this one out :P Alfonso didn't, and he did net 10R on this. The other two trades would also have been multiple R winners. In hindsight I really don't know how I missed all these setups, I'll need to be more diligent and watch the charts more closely in the coming month.

The thing is this, an Engulf tells you price wants to go to the next zone. Placing a limit order at the source of the engulf is a super low risk high reward way to enter a trade. If this ends up as a loss, it means that either you were faked out or a trend change has occurred. Now a trend change usually occurs when price has reached an opposing higher time frame zone or S/R flip level, that is when you want to stay out. This also does not work in a ranging environment as lots of fakeouts will occur then (EURUSD in the past few weeks is a good example). There is obviously more to this, and I have a lot of odds enhancers (no trading before major news, watch for correlation with Dollar Index, watch all yen pairs as a whole, watch approach to zone, watch for confluence or chart patterns etc) but yep that is the basic idea.

My Trading Plan

So I've been demoing like crazy past few days and to be honest, getting owned big time. I've been trying out the various styles of trading S/D and it is apparent that my knowledge is half baked and I'm not disciplined/picky enough. So after repeated failed trades and getting discouraged over and over again, I finally decided that I need to do something about this. We all know the common adage "He who fails to plan, plans to fail". I've been trading a lot on discretion and taking all sorts of zones and bars, as a result losing a lot of trades. I need a plan, rules to stick to, rules that'll help filter bad trades and prevent emotional trading.

There are many styles of trading S/D, and I'm only destroying my confidence by trying to master all of them at once and seeing my demo account's balance continually dip. I've decided to focus on one style for now. And I've decided to return to the thread where it all started, the Price Is Everything thread. The OP Redsword is legendary, and out of his sharing/teaching spawned numerous excellent traders. Studying the thread wasn't an easy task, considering the bits and pieces of information are everywhere and there are no fixed trading rules. It was vague at first, but after 70+ pages things are beginning to become clearer. I save the more descriptive charts from the thread and study them repeatedly, taking down notes whenever I learn something. I started noticing certain repeating patterns and things that Redsword looks out for. There are many gems of wisdom in the thread but they're everywhere. I'm determined to keep at it and try to uncover as much from it as possible.

Based on what I know so far, I've decided to come up with a preliminary trading plan and I shall be focusing on it for the coming weeks. No more touch trades, no more shotgun trading. I'll only take trades which fulfill the criteria in this plan and that should help filter away many bad trades and increase my confidence with time. What if I still fail? Well there is a positive aspect to that too. It means that I can add more things to my trading plan and further improve it. So here is my preliminary trading plan:

It is definitely not final but it should do for now. I shall not post example charts as the thread above has tonnes of it. Looking forward to see how it goes!

Scalping Low Time Frames With Huge R:R

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

A New Way Of Money Management - Trade Sequencing

Ok I'm super excited now. I just read an interesting money management strategy which I think has enormous potential. Here is the excerpt:


So during my Binary Options adventure, I started to use a money management system that initially was to overcome the negative R aspect of Binaries. Basically I compound in sequence of 3 or 4 - meaning i need to win 3 or 4 in a row!

But that's actually not that hard if you are patient and take only the best setups - mentally it's also easy as you know at the end of a 4 trade sequence you will have ~15R return.

This in turn helps with starting your sequence and not being over leveraged at the beginning, so you aren't risking too much of your trading capital to start. You just need to take the view that the accumulated profits mid sequence aren't your money yet until the end of the sequence.

Take a $5000 account - 2% risk per trade --> I do 2% per sequence so risk is $100 and I go for 1R trades only.

trade 1 - Risk $100 of trading account -> wins so I get $100 profit - 1R
trade 2 - Risk $100 of trading account + profit from last trade = $200 risk - wins $200 so total profits are now $300 - 3R profit on original $100
trade 3 - Risk $100 of trading account + profit from last trades = $400 risk - wins $400 so total profits are now $700 - 7R profit on original $100
trade 4 - Risk $100 of trading account + profit from last trades = $800 risk - wins $800 so total profits are now $1500 - 15R profit on original $100

after the 3rd trade you have a cumulative R of 7 and after the 4th a cumulative R of 15. How often can you pick a swing big enough to return 7 or 15R? compared to picking small 1R hops?

Conservative Trading - Aggressive Money Mangement. 

The above helped my psyche enormously. It still takes skill, but it makes you avoid taking marginal setups and waiting for the really good ones, because you know the pay off at the end will be worth it. That's how I nailed my discipline. Also, because the payoff is so good, but reliant on my trades running to target - i just let em run. It's also far easier to take the small 1R hops, than to find those 10R swings.

What happens if you lose on the 4th trade? well you only lose $100 of your initial capital - the rest was 'house' money and the potential return was worth it  You only need to pull of 1 x 4 sequence trade to fund another 15 attempts!

You can start of by just doing 2 at a time for a cumulative R of 3 - most people would be happy with a 3R trade 

I always thought if doubling down on losing trades was really bad - then the opposite must be true if you double up on winners! and it is!

OK actually I came across it somewhere else last week but couldn't understand it. In fact I think my understanding of it now is probably only half baked, but I can definitely see the tremendous potential in it. In short, the strategy involves adding the profit from individual trades to the risk amount. My initial thought when I came across it last week was that it is pointless because I could win 3 times in a row and  if on my 4th trade I lost, all the accumulated profits would be gone. What I didn't realize was that if I blew up one sequence, the most I could lose was 1R, but if I pulled off a sequence of 4 successfully, my accumulated profits would be 15R! Like what the excerpt mentioned, I only need to pull off one sequence to fund another 15 attempts!

Mind blowing fact: If a damn good scalper is able to be very picky and he is able to nail 2R per trade consecutively for a sequence of 4 (meaning 4 consecutive wins of 2R each), he would have more than doubled his account (260% increase). FREAKING UNBELIEVABLY AWESOME RIGHT?! In other words, all this scalper needs to do is to keep trying until he pulls off a successful sequence, and bingo 260% increase on his account. Each failed sequence would only cost 1R so the downside is limited.

Ok now here are my thoughts towards it. First of all, this management strategy is only for veterans. I'm talking years of experience in trading. Why so? Because the key to it is a very very high win rate, like 80-90+%. Well I suppose a low win rate with high win amount would also work, but that would require a tremendous (almost robotic) amount of patience and faith as it could be ages before one pulls off a successful sequence. This management strategy also requires a huge amount of discipline and mental strength. One might not be comfortable with an insanely large trade size on the 3rd or 4th sequence. He might also be tempted to take profits too early because the profit amount then is very huge and is not something he is used to seeing.

I will not try it on my live account because I've not proven my consistency and I know that I do not have the mental tenacity and patience yet. However it is definitely something I'll look into in future, and quite possibly is the Holy Grail to exponential account growth.

Supply/Demand Concepts On AUDNZD and USDJPY Chart

AUDNZD M15

USDJPY M5

Was looking at some charts and it was amazing to see how some Supply/Demand concepts played out. Notice that after breakouts, price doesn't always retrace to the classical S/R level and rebound there. It'll sometimes cut through the S/R level and reach for the demand zone which is the origin of the breakout. Why does it do so? We are taught that the definition for a breakout is price breaking a S/R level. That is true, but we do not realize that the origin of the breakout is not always at the S/R level, sometimes it starts below it as in the above two examples. We can identify these origins as levels where price burst very rapidly and sharply. From an order book perspective, there are still many unfilled buy orders there. As such, professionals will sometimes spike price all the way back down to target these levels and get the buy orders filled. Think about it, many textbook traders who bought the breakout will have their stops below the classical S/R level, I used to do so too. When prices drop below this level, these traders will have to cut loss (sell), propelling price further down towards the demand zone where the professionals happily get their buy orders filled.

Also, notice the regions of compression in the AUDNZD chart? See how price often cuts through compression regions very swiftly. Again this is because there is nothing left in that region to stop price as the professionals have already prepared their path and removed any supply/demand prior to the move.

The Concept Of Compression And Some Trades

I really want to talk about this concept called Compression. In fact this blog entry has been long overdue. First of all read about compression here as it is too much to explain in detail. In summary, it is a way to spot how the professional money is preparing for the next move. If price is compressing down to a demand zone, go long, if it is compressing up to a supply zone, go short. Really good traders will touch trade at these zones, but I'm still relatively new and so am combining this concept with the James16 PA setups. Here are some trades I took recently based on this combination.

AUDNZD 12H

EURGBP 1H

GBPCAD 1H

CP stands for Compression. There are more reasons as to why I took those trades, but the gist is that they formed a PA setup at a demand or supply zone (not shown in pics) and were compressing before that. Now notice one thing, if the analysis is correct, price can shoot to the profit target very very quickly. Why is this so? I'll try to explain using the EURGBP chart above. As price is moving up, notice that it keeps spiking back down before moving up again? This is because the professional money is deliberately spiking price down to consume the buy orders from any prior demand zones. They're trying to remove demand to prepare for a big move down. When price finally hits a supply zone and they get their sell orders filled, there is no more demand below to hold price up. As a result price will often just shoot through the entire area very quickly.

Isn't Compression amazing? I only posted three charts but trust me I've seen tonnes of examples on all time frames. And think about it, I made the above trades using conservative PA setups, which means my stop loss is a lot wider and position size smaller. Now imagine top notch traders (Many of them in ReadTheMarket) who are so confident in their levels that they touch trade using a small 20-30 pip stop. The above setups would have netted them more than 10R easily. On 2% per R, that is already a 20% increase on the account. Sounds ridiculous? I'm beginning to think more and more that it is highly possible. I mean, how does a person trade actively for >5 years and not get better and better at identifying the best zones/levels? He would also have a much better feel for the markets and know which are the best setups and which are the ones to avoid.

I'm really going to aim for the sky, yes I want to keep improving until I can consistently make a double digit % increase on my account monthly. I just need to fully understand and get comfortable with the supply/demand concepts so that I can start touch trading with a very tight stop. That I believe, will be the next level of my trading.

Stop Hunting From An Order Flow Perspective

I'm so excited! I want to write about something I learned recently which is freaking golden in my opinion. Now you don't find this in textbooks but it makes complete sense and is definitely something that will be in my trading arsenal. I'm going to use two charts as an example.

GBPUSD Daily

CADCHF 4H

This idea is this: There are instances where we get a reversal setup like a pin at a double top/bottom. Countertrend traders get excited over this and jump in. To their horror price takes them out and goes on a little further before moving in their original intended direction. Why does this happen? Look at the charts above, the first arrow is where many people will enter. On GBPUSD they would have interpreted the first arrowed bar as a bullish pin with double bottom. On CADCHF they would have seen a false breakout pin bar. Sounds legit? What went wrong then? The answer lies beyond. Look at the rectangled areas at prior swing highs/lows which also coincides with a round number. Beyond these points are huge pockets of stops. We know this FOR SURE because they are very distinct major swing highs/lows and are round numbers. Now imagine you're a market maker. If you're bullish on GBPUSD and bearish on CADCHF, why on earth would you not target these stops since they're so near? They provide HUGE amount of liquidity for you to fill your orders! See the beauty of this?

So the conclusion is this: When we get a setup, zoom out a little, add the round numbers, and imagine yourself as a market maker. Would you be satisfied to move price where it is or target further obvious zones of stops? If the answer is the latter, DO NOT take the setup. In fact, very often the initial setup is sub optimal to begin with. This sub optimal setup will in turn suck in less experienced traders and provide even more liquidity for the market makers when they get stopped out too. In the case of GBPUSD, we have a weak pin which did not hunt any stops and lacks confluence. Somebody who just learned about pins would have jumped in here and get trapped. I know because I've been there so many times.

Seriously the above knowledge is super golden, I'm so glad I chanced upon it and I know it'll protect me from many failed setups as well as help me take many other A+ setups.

Double/Triple Tops - My Bread And Butter Setup (For Now)

Been so long since I last blogged, and I can only attribute it to laziness plus the desire to spend my time on other things. Anyway I've been doing a lot of reading/chart time as well as thorough planning and analysis of the kind of trader I am. I concluded that I'm someone who likes a high win rate, like 80-90%, and don't mind if these wins are small in percentage. I've realized that a trend following system often only has a <50% win rate due to the necessity of a wider stop to avoid being stop hunted or washed out by noise. I'm fully aware that a 80-90% win rate system is highly unlikely to capture big trends, though it is still possible if a trade just runs without any deep correction. Having established that and after doing a lot of visual back testing, I've decided on my bread and butter setup.

The setup is basically double or triple tops (or bottoms) with a pin/engulfing bar, divergence, and sufficient space. That's it! Here is the trade criteria and some example charts:

Trade Setup

1. Double/Triple Top
2. MACD Bearish Divergence
3. Pin/Bearish Engulfing bar
4. Fake Breakout (Optional but adds a lot more weight if it happens due to trapped traders)
5. Confluence of the following Support/Resistance factors (The more the better)
• Horizontal S/R
• Fibonnaci Levels
• Round Numbers
6. Sufficient space for price to move into (This is very very important)
7. Compression

Chart Examples

GBPUSD Daily

USDCAD Daily

Trade Management

This is pretty discretionary, but personally I'm trying out a strategy of taking half profits at the first trouble area, tightening my stop, and trailing the second half. It is too much to go into the details of a trouble area or the trailing method.

This setup really does have a hit rate of 90% and above, and by that I mean price should at least reach the first trouble area for us to either take half profits or tighten stops to ensure it will not become a losing trade. This setup is according to James16 the highest probability setup, and he knows of very huge account full time traders who only trade this setup. Now here is the interesting thing. This setup is also acknowledged by Alexander Elder as the strongest signal in technical analysis. Not enough? A pin bar is also a Wyckoff/VSA Spring/Upthrust, and well known Wyckoff practioner David Weis mentioned that one could make a decent living just trading these bars alone. 

I've without a shadow of doubt that this setup should be taken every single time it appears. Now admittedly it is very rare, and so I'm looking for it on the weekly, daily, 4H, and 1H time frames. Now here are the main reasons why this setup might fail: 

1. Trading into support/resistance (Lack of space)
2. Price action setup was too small (Small Pin/Engulfing)
3. Failure to take partial profits or tighten stop at the first trouble area
4. Entering on lower timeframe (1H/4H) just before major news

Avoid these pitfalls and success should be guaranteed. I'm starting my hardcore hunt for these setups, lets see how it goes. 

Btw I'm really grateful to the James16 group and especially to one of the instructors Mike who has helped me so much. In the past 2 weeks I've taken 9 trades on my demo account, 4 on my live, and none of them were losing trades. They were either wins or breakevens, though the winning trades are not huge. I am finally seeing progress in my trading, and I attribute it all to the James16 group. This group doesn't teach a system, it teaches how the market move and where price is likely to react. Based on that the members have derived many successful strategies/systems, and the beauty of it is just amazing.