BTC - Harmonic Patterns pt.1 'THREE DRIVES PATTERN' (beginners)
You may be wondering why you keep losing money in the markets. Well, we've all been there - more often than we wished for. But we asked for it every single time. So, why is that?
After years of repeatedly or constantly losing money, I know very well what I've been doing wrong for so long. I came to the conclusion that I - and most people I observed or know in person - keep losing money because of several factors, one of which I will elaborate in this sheet:
The absence of a system
Many people, who are new to the world of trading and investing, especially those who have suffered (severe) losses in the past, are drifting around, clueless, and are seeking for a helping hand that is supposed to guide them around in the world of making and losing money. That state of helplessness and the general accessability of the internet and social media is the perfect playground for fraud. Since there has been a wave of fake (marketing) gurus all over the internet for quite a while, that many fell victim to, the term 'system' is now broadly misunderstood and causes fear among those who were scammed by 'THE MAGIC AND ALWAYS WORKING SYSTEM'. Usually 'gurus' on the internet charge money for providing a system or pretending to educate people about how to 'REALLY' make money. So what is a system?
Before finally adopting or developing a system, one must know what a system is defined by, and what criteria a system has to meet. So what does a system do?
A system is supposed to allow one to evaluate more or less reliable entry points/levels. But what does that mean? It means that you don't want to participate in EVERY major move the markets offer you to be part of. In fact a system will focuse on a very specific kind of moves, and you are only supposed to trade/invest according to the potential entry that the system you use provided. You will most likely miss out on many moves, and you will think about the amounts of money you could have made if you had just been part of that one major move that you can't stop thinking about. That thought-process is self destructive though, and will lead to suffering even more losses because most people force themselves to not miss out on the next move, in order to finally be part of the wave that makes the real money. But what defines a proper system? How do you know it works? Well, there is only one way to find out.
One who sticks to a system - or several - would only want to take the entries the system provides for them, regardless of what happens outside of their system's frame. And yes, that means missing out on many, many, and many more major moves. However, atually making money by applying a system leads to 'strategy building', which focuses on, or consists of 'money management' and 'risk management'. That is a whole other topic though, which I am looking forward to explaining in further educational posts, but not in this one.
A system is supposed to allow you to evaluate ONE specific entry, according to specific conditions that have to be met. In order to allow you to pick up on what I'm trying to say I have prepared a very simple example of a system (also referred to as 'technique'). Since many people wanted to be part of the crypto-spikes that we have recently seen, and bought coins at all time highs, I decided to demonstrate several harmonic techniques on the BTC chart.
First of all: Where are we? Where is the example taking place?
For having a better idea about the scale and location I added this snapshot of the BTC chart in the daily timeframe:
(ALL FOLLOWING SNAPSHOTS WERE TAKEN IN 13H TMF)
A system, or technique, may be very simple. The strategy your system will be part of will be more complex. But the system itself may surprisingly be very simplistic. For instance: I have been trading with the use of 'harmonics' for a very long time. I focused on TWO different types of harmonic patterns.
1) AB=CD patterns (ABCD)
2) Three Drives patterns
In this case, you could make use of the examples I will provide in a second in two different ways, since they'd have given away a short signal on BTC at the ATH.
1) actually shorting BTC, which isn't a very popular method, since not many brokers offer the ability to short sell crypto currencies, and if they do, it often is very expensive to execute. However, some still do it, and this would've been a perfect entry for a short order.
2) interpreting it as a warning signal to either a) getting out of BTC or to b) not buying more coins.
I'll introduce the 'Three Drives pattern' in this post, because it was a very clean, textbook-like pattern in this specific case:
So, this is the pattern I have spotted that the BTC ATH (all time high) consists of/portrays. As I have mentioned several times already, a system shall provide an entry. So, only if the requirements are met, you are allowed to make a trade. Since some of you may be unaware of what a three drives pattern is, and how to trade it, i will break it down for you:
A three drives pattern is a series of lower lows or higher highs which occur in a very specific relation to each other and usually indicate the market may turn around after completing the pattern. It focuses on analysing the time/price relation between said highs or lows. In detail:
It consists of three drives, as the name gives away, which may be a series of three consecutive higher highs, or lower lows:
bearish:
bullish:
each drive is interconnected with a corrective move, the corrective moves will play a very decisive role in determining the entry.
bearish:
bullish:
The numbers (1.27) that the three drives pattern, that Tradingview offers, already includes, measure the price excess of the correction move in relation to the next high.
In order for the trade to be executed the price excess must either be 1.27 or 1.618 (1.62 approx.).
If you're uncomfortable with the three drives drawing tool you could simply measure it by yourself using a fibonacci retracement featuring the 1.27 and 1.618 extensions and apply it on the corrective moves of the three drives pattern, just like this:
The following drive should then bounce off the 1.27 or 1.618 extension. You must apply the Fib rectracement on the second correction wave too.
The end of the 3rd drive, which should bounce off the 1.27 or 1.618 extension too would then initiate the trade. You would SIMPLY (according to this system) make a trade.
All that you have to do is to find a system that has proven to work out to a certain degree in the past (always do never ending backtesting), implement it in your strategy (risk-, and money management) and strictly take the entries that your system provides for you. A system is supposed to give you the confidence you need to blindly execute it according to its rules and requirements. The only way to gain said confidence is to a significant amount of backtesting
over and over again, and literally studying the system. A trade that you are afraid of to take, for whatever reason, can still be interpreted as a strong signal to close your current positions, as in the case of this BTC example. Not many people would dare to simply short BTC on the ATH, but relatively many people would probably start takeing profits or selling their coins if they spotted a short entry - according to whatever system(s) they may use. There is not THE perfect system out there. Find a system you can apply confidently and implement it in your strategy.
Now, the remaining question is where to take profits once you're in. The Three Drives pattern offers several take profit levels. There may be other ways to successfully take profits, but this is the way that has proven to be the most profitable one for me:
I usually simply attach a FIB retracement to the end of the first correction move and to the end of the 3rd drive, and I take partial profits at each of these marked levels. (0.382; 0.5; 0.618; 1.0; 1.27; 1.618).
Back to the REAL example:
the entry:
the take profits:
While there are many ways to apply or trade the Three Drives pattern, and some focuse on the retracements in specific, while I focuse on the extensions of the correction moves only. I don't pay much attention to the retracement level of the correction moves because there simply isn't a reliable retracement level. Some fall back to 0.382 while others retrace as far as 0.618 or 0.786.
The issue with trading and investing is, that one's ANALYSIS is one thing, but actually initiating a trade, spotting the chance of making money in time and not hesitating to take action is a whole other thing. The only way to act with confidence when the time has come and to actually making the trade is to apply a system that has PROVEN to work. If you don't have a system you won't have the guts to take the chance for a good trade because you burned your hands in the past. Focuse on the entry. Not on where prices may go in the future. If you got your entry right, you can take profits wherever you want to. An analysis doesn't make money. The trade does. The market may do whatever, no one knows what tomorrow will bring, so focuse on the only thing you can influence: The entry and the risk that comes with it. And take profits. Especially in these times.
Whatever it is that you do, may it be automated or manual trading, the only way to prove a system is working, is to backtest it. Over and over again, on hundreds or thousands of examples.
Thank you for taking the time to reading this rather complex and long article. Cheers ;)
After years of repeatedly or constantly losing money, I know very well what I've been doing wrong for so long. I came to the conclusion that I - and most people I observed or know in person - keep losing money because of several factors, one of which I will elaborate in this sheet:
The absence of a system
Many people, who are new to the world of trading and investing, especially those who have suffered (severe) losses in the past, are drifting around, clueless, and are seeking for a helping hand that is supposed to guide them around in the world of making and losing money. That state of helplessness and the general accessability of the internet and social media is the perfect playground for fraud. Since there has been a wave of fake (marketing) gurus all over the internet for quite a while, that many fell victim to, the term 'system' is now broadly misunderstood and causes fear among those who were scammed by 'THE MAGIC AND ALWAYS WORKING SYSTEM'. Usually 'gurus' on the internet charge money for providing a system or pretending to educate people about how to 'REALLY' make money. So what is a system?
Before finally adopting or developing a system, one must know what a system is defined by, and what criteria a system has to meet. So what does a system do?
A system is supposed to allow one to evaluate more or less reliable entry points/levels. But what does that mean? It means that you don't want to participate in EVERY major move the markets offer you to be part of. In fact a system will focuse on a very specific kind of moves, and you are only supposed to trade/invest according to the potential entry that the system you use provided. You will most likely miss out on many moves, and you will think about the amounts of money you could have made if you had just been part of that one major move that you can't stop thinking about. That thought-process is self destructive though, and will lead to suffering even more losses because most people force themselves to not miss out on the next move, in order to finally be part of the wave that makes the real money. But what defines a proper system? How do you know it works? Well, there is only one way to find out.
One who sticks to a system - or several - would only want to take the entries the system provides for them, regardless of what happens outside of their system's frame. And yes, that means missing out on many, many, and many more major moves. However, atually making money by applying a system leads to 'strategy building', which focuses on, or consists of 'money management' and 'risk management'. That is a whole other topic though, which I am looking forward to explaining in further educational posts, but not in this one.
A system is supposed to allow you to evaluate ONE specific entry, according to specific conditions that have to be met. In order to allow you to pick up on what I'm trying to say I have prepared a very simple example of a system (also referred to as 'technique'). Since many people wanted to be part of the crypto-spikes that we have recently seen, and bought coins at all time highs, I decided to demonstrate several harmonic techniques on the BTC chart.
First of all: Where are we? Where is the example taking place?
For having a better idea about the scale and location I added this snapshot of the BTC chart in the daily timeframe:
(ALL FOLLOWING SNAPSHOTS WERE TAKEN IN 13H TMF)
A system, or technique, may be very simple. The strategy your system will be part of will be more complex. But the system itself may surprisingly be very simplistic. For instance: I have been trading with the use of 'harmonics' for a very long time. I focused on TWO different types of harmonic patterns.
1) AB=CD patterns (ABCD)
2) Three Drives patterns
In this case, you could make use of the examples I will provide in a second in two different ways, since they'd have given away a short signal on BTC at the ATH.
1) actually shorting BTC, which isn't a very popular method, since not many brokers offer the ability to short sell crypto currencies, and if they do, it often is very expensive to execute. However, some still do it, and this would've been a perfect entry for a short order.
2) interpreting it as a warning signal to either a) getting out of BTC or to b) not buying more coins.
I'll introduce the 'Three Drives pattern' in this post, because it was a very clean, textbook-like pattern in this specific case:
So, this is the pattern I have spotted that the BTC ATH (all time high) consists of/portrays. As I have mentioned several times already, a system shall provide an entry. So, only if the requirements are met, you are allowed to make a trade. Since some of you may be unaware of what a three drives pattern is, and how to trade it, i will break it down for you:
A three drives pattern is a series of lower lows or higher highs which occur in a very specific relation to each other and usually indicate the market may turn around after completing the pattern. It focuses on analysing the time/price relation between said highs or lows. In detail:
It consists of three drives, as the name gives away, which may be a series of three consecutive higher highs, or lower lows:
bearish:
bullish:
each drive is interconnected with a corrective move, the corrective moves will play a very decisive role in determining the entry.
bearish:
bullish:
The numbers (1.27) that the three drives pattern, that Tradingview offers, already includes, measure the price excess of the correction move in relation to the next high.
In order for the trade to be executed the price excess must either be 1.27 or 1.618 (1.62 approx.).
If you're uncomfortable with the three drives drawing tool you could simply measure it by yourself using a fibonacci retracement featuring the 1.27 and 1.618 extensions and apply it on the corrective moves of the three drives pattern, just like this:
The following drive should then bounce off the 1.27 or 1.618 extension. You must apply the Fib rectracement on the second correction wave too.
The end of the 3rd drive, which should bounce off the 1.27 or 1.618 extension too would then initiate the trade. You would SIMPLY (according to this system) make a trade.
All that you have to do is to find a system that has proven to work out to a certain degree in the past (always do never ending backtesting), implement it in your strategy (risk-, and money management) and strictly take the entries that your system provides for you. A system is supposed to give you the confidence you need to blindly execute it according to its rules and requirements. The only way to gain said confidence is to a significant amount of backtesting
over and over again, and literally studying the system. A trade that you are afraid of to take, for whatever reason, can still be interpreted as a strong signal to close your current positions, as in the case of this BTC example. Not many people would dare to simply short BTC on the ATH, but relatively many people would probably start takeing profits or selling their coins if they spotted a short entry - according to whatever system(s) they may use. There is not THE perfect system out there. Find a system you can apply confidently and implement it in your strategy.
Now, the remaining question is where to take profits once you're in. The Three Drives pattern offers several take profit levels. There may be other ways to successfully take profits, but this is the way that has proven to be the most profitable one for me:
I usually simply attach a FIB retracement to the end of the first correction move and to the end of the 3rd drive, and I take partial profits at each of these marked levels. (0.382; 0.5; 0.618; 1.0; 1.27; 1.618).
Back to the REAL example:
the entry:
the take profits:
While there are many ways to apply or trade the Three Drives pattern, and some focuse on the retracements in specific, while I focuse on the extensions of the correction moves only. I don't pay much attention to the retracement level of the correction moves because there simply isn't a reliable retracement level. Some fall back to 0.382 while others retrace as far as 0.618 or 0.786.
The issue with trading and investing is, that one's ANALYSIS is one thing, but actually initiating a trade, spotting the chance of making money in time and not hesitating to take action is a whole other thing. The only way to act with confidence when the time has come and to actually making the trade is to apply a system that has PROVEN to work. If you don't have a system you won't have the guts to take the chance for a good trade because you burned your hands in the past. Focuse on the entry. Not on where prices may go in the future. If you got your entry right, you can take profits wherever you want to. An analysis doesn't make money. The trade does. The market may do whatever, no one knows what tomorrow will bring, so focuse on the only thing you can influence: The entry and the risk that comes with it. And take profits. Especially in these times.
Whatever it is that you do, may it be automated or manual trading, the only way to prove a system is working, is to backtest it. Over and over again, on hundreds or thousands of examples.
Thank you for taking the time to reading this rather complex and long article. Cheers ;)