Hi All, I wanted to explain some things with advanced patterns and basic analysis of trades.
Many traders wonder why cant we trade an aggressive C leg and ride it all the way to the D completion. In this chart, after we have the B Leg 50.0% would you trade just past the 38.2% which is the C leg for BAT - if so you would have had buy order and lost. How do you know when the C leg will complete?
Thats why we have X to A - A to B Minimum 50.0% B to C Min 38.2% - C to D 88.6% Stars have aligned
The C Leg is when we keep our eye out and look for the Move to go past B Leg with the anticipation for the 5th Star
If you have another reason to enter the C maybe a double bottom, or structure based move in anticipation to trade it below the B leg then that would be a valid trade.
How do we even know it will get to this point it could just drop past A leg, this is why we wait for the D completion because the highest probability that the Market will respect the XABCD is what we like to say when all the stars align, these ratios of advanced patterns are the reason for these patterns being the highest probability of seeing a reversal.
If you traded an aggressive C how would you know that the targets will be all the way up to 88.6%? and not climb with a small retracement then fall through to hit your stops, to go further down to maybe create a C leg for a Cypher Pattern.
This is why these ratios are very important at the final D which as you can see is the 5 stars aligning in these ratios.
In backtesting and forward testing see here why it is so important not to get emotional with price going past our X leg and almost stopping us out, we stick to our rules and dont move stops. In this trade I had my min stops above the 1.15000 @ 1.15120
Sometimes we see traders saying they moved stops down because they thought they could save 20 pips of loss only to see the markets stop them out and what we see here, falls through to hit TP1 so far. Then they pull their hair out and try to get back in on the trade. And they have no real idea of entry stops targets and it drives them to take proift early again when they see a small blip of Green.
They start revenge trading to try to get back what they lost. They may increase position size and lose one trade with double position size driving their equity down hill.
I think form memory this was close to 90 pips above entry before being extended so far that in this time we had sellers jumping on board and buyers taking profits.
Again we see traders taking early profits before TP2 is hit then the market falls another 20 pips past the Target 2 and they think next time I will hold, and next time price comes back to break even and they think I should have taken profit early. They start to question themselves instead of trading the plan. They will change their strategy and eventually it will continue to lose, until they step back 2 gears and say they need to just stick to their plan and trade it. So in this time of breaking their rules they have lost what should have been winners.
With this trade it may easily go back to hit Break Even, this is the best position a trader can be in when we have Target 1 and the second trade has a protection of equity by having our stop at break even.
In this situation because we extended so high before falling our break even stop is more likely to be hit - why? Because the market pushed so far past Entry and now the market has a higher chance of extending back towards the Structure level that went past our X point.
The highest probable chances of hitting TP2 is obviously straight down which we all love so much when this happens. If price hits our Entry then falls to TP1 and just past it, then the market needs to Extend almost 100% to stop us out for our second break even stop. These are higher probability second targets because most likely the market wont increase that high before seeing more sellers come on board.
Hope this helps and all the best.
Many traders wonder why cant we trade an aggressive C leg and ride it all the way to the D completion. In this chart, after we have the B Leg 50.0% would you trade just past the 38.2% which is the C leg for BAT - if so you would have had buy order and lost. How do you know when the C leg will complete?
Thats why we have X to A - A to B Minimum 50.0% B to C Min 38.2% - C to D 88.6% Stars have aligned
The C Leg is when we keep our eye out and look for the Move to go past B Leg with the anticipation for the 5th Star
If you have another reason to enter the C maybe a double bottom, or structure based move in anticipation to trade it below the B leg then that would be a valid trade.
How do we even know it will get to this point it could just drop past A leg, this is why we wait for the D completion because the highest probability that the Market will respect the XABCD is what we like to say when all the stars align, these ratios of advanced patterns are the reason for these patterns being the highest probability of seeing a reversal.
If you traded an aggressive C how would you know that the targets will be all the way up to 88.6%? and not climb with a small retracement then fall through to hit your stops, to go further down to maybe create a C leg for a Cypher Pattern.
This is why these ratios are very important at the final D which as you can see is the 5 stars aligning in these ratios.
In backtesting and forward testing see here why it is so important not to get emotional with price going past our X leg and almost stopping us out, we stick to our rules and dont move stops. In this trade I had my min stops above the 1.15000 @ 1.15120
Sometimes we see traders saying they moved stops down because they thought they could save 20 pips of loss only to see the markets stop them out and what we see here, falls through to hit TP1 so far. Then they pull their hair out and try to get back in on the trade. And they have no real idea of entry stops targets and it drives them to take proift early again when they see a small blip of Green.
They start revenge trading to try to get back what they lost. They may increase position size and lose one trade with double position size driving their equity down hill.
I think form memory this was close to 90 pips above entry before being extended so far that in this time we had sellers jumping on board and buyers taking profits.
Again we see traders taking early profits before TP2 is hit then the market falls another 20 pips past the Target 2 and they think next time I will hold, and next time price comes back to break even and they think I should have taken profit early. They start to question themselves instead of trading the plan. They will change their strategy and eventually it will continue to lose, until they step back 2 gears and say they need to just stick to their plan and trade it. So in this time of breaking their rules they have lost what should have been winners.
With this trade it may easily go back to hit Break Even, this is the best position a trader can be in when we have Target 1 and the second trade has a protection of equity by having our stop at break even.
In this situation because we extended so high before falling our break even stop is more likely to be hit - why? Because the market pushed so far past Entry and now the market has a higher chance of extending back towards the Structure level that went past our X point.
The highest probable chances of hitting TP2 is obviously straight down which we all love so much when this happens. If price hits our Entry then falls to TP1 and just past it, then the market needs to Extend almost 100% to stop us out for our second break even stop. These are higher probability second targets because most likely the market wont increase that high before seeing more sellers come on board.
Hope this helps and all the best.
