Wednesday, June 04, 2008

How do patterns form

How do patterns form on different timeframes. We all can agree, that the same patterns are visible regardless of the timeframe. Now have you asked yourself how a Double Top on a 30minute chart looks on a 5 minute chart or a 10 tick chart.

1. The daily highs and lows are visible on all timeframes

2. A double top on the 30min chart might be visible on the 5 minute chart, if the bars forming the top are not too far apart, so you still can see them.

3. You will certainly not see the double top on the 30minute chart on the 10 tick chart, instead the 10 tick chart will form its own pattern. But as we know that one bar of the 10 tick chart makes the high seen on the 30minute and the 5 minute chart that top on the 10 tick chart will look like a high failure or a double top or a failed breakout above a prior top on that 10 tick chart and a reversal down.

Now we have to differentiate:

A. Trend continuation

a. If a trend continues, then we see higher highs and lows on the longer timeframe chart eg. 30min.

b. We have a retracement on that uptrend, which we see on the 5 minute chart

c. And we have the 10 tick chart which forms a downtrend showing lower highs and lows as long as that retracement lasts.

d. Now that retracement comes to an end and a bottom forms. We see lows forming on the 30min chart, the 5 minute chart and the 10 tick chart. We do nothing.

e. We bounce upward and we stall, because Sellers which caused that retracement are not willing to give up so easily. And we go down again.

f. We have a second low on our 30min chart or it happens within one 30min bar, then we see that second low forming a double bottom on the 5min

g. We watch the 10 tick. Yes we see that low, we go up, we stall, we go down and BINGO: we have a higher low or a double bottom on the 10 tick and we are long

h. As you can see to go long on a trend retracement gives you a lot of time to go actually long. You get the preparation on the 30minute, you get advance warning on the 5 minute and you have time to commit while you wait on the 10 tick to form the entry.

i. Here you may decide not to wait for the signal, but to anticipate the Double Bottom forming on the 10 tic chart. I place a limit order 1 tick above the bottom on the 10 tick and if hit I get a great entry for the long.

B. Trend reversal

a. We have a Top and we see that top on the 30minute, the 5minute and the 10 tick chart

b. Being a Market Structure High, a Reversal starts (something we only know in hindsight)

c. That reversal starts on the 10 tick chart. Here we see a high failure or a Double Top and we go down.

d. We are still within that bar forming the high on the 5minute chart and certainly within the 30 minute bar. These give us no signal. The only signal we have that the market is overdone and ready to roll-over is the 10 tick chart telling us that the market was not able to trade higher.

e. How can we trade such a reversal?
We can, if we jump in front of the Freight Train and say: “Market! Stand Down and Turn around. This is Chris the mighty and I’m telling you: Enough is Enough … Down you Go”
Ask yourself how often you have done it Secret telling

f. Truth be told you can of course jump in front of the freight train if there are other factors or signals not seen in the price action, which tell you that there is a very good chance that the market will turn. I use round numbers or points from yesterdays close or just my knowledge how far any move in a certain contract on average goes on spikes before we see a retracement to get these outside factors. But you need to be on your toes, you need to be aware, that the market might not bow before “Chris the Mighty” and just leave behind “Chris the Beaten” on its path to new highs or lows.

g. When we have made the top, the next to reveal that there really is a top in place will be the 5 minute chart forming a Reversal pattern and if its really a trend reversal we will finally see the test and failure of the test on the 30 minute chart.

h. To go short in a long trend betting on a trend reversal to happen asks for a fast trigger finger and decisive action. You have no time, you have no ample preparation. You see it happen on the 10 tick chart and you execute your plan as near to the high as possible. If you wait you will be left behind or sit in a losing position until the market decides to really roll over.

 

Globetrader_01

Here you have a chart of a trend short today on oil. First take a look in the lower right corner. That’s my 30minute chart. I have marked the lower double top which formed today

Then look at the big chart to the left which is my 5 minute chart. There you see clearly the resistance zone formed and marked at the 127.65-127.95 area. And last the upper chart to the right, which is my 10 tick chart.

You could have taken the short at 127.60 or at the second lower Top formed at 127.48. Enough time and options to enter the short for a 50 to 80 ticks trade. For the exit I trail and have target orders, which get adjusted, depending on the speed of the market.

Globetrader_86

Trend trading that way is not fancy, there is no fame in a lot of trades to be made. That one trade I mentioned made 50 to 80 ticks, that’s 500 to 800 $ / contract. Sure you need to hold that long, you need the conviction to hold onto your winner for 20 long minutes, while you were sitting on a lot of profits always thinking: It might reverse, it might reverse, it might reverse…let’s take the profits now.

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