Let's trade a reversal pattern

My setup is based on price action, supply demand zones and measured move. The reversal pattern is confirmed by a oscillator divergence pattern. I'll use MACD with default settings here but use whatever you like. Oscillator divergence is not required but I like to have it. Why measured move? I like to make things systematic. The hardest part of trading is not setup but execution. Strict rule based strategy could make your life easier.

5-step process
1. Find the pattern.
2. Confirm it with MACD divergence
3. Measured the leg
4. Set your limits and stop.
5. Accept whatever result you got.

Let's dig into each step.
1. Failed swing H/L (fakeout)

2. Oscillator divergence is not just a pattern. It represents a slown down momentum. It makes sense that momentum is slown down when reversal occurs.

3. Slown down momentum is not enough. We also need a breakout of that reversal pattern to make sure the reversal pattern is complete.

4. With measured move, we could easily see where we want to engage with a pre-defined risk reward. The limit order is set on 50% or 61.8% of the retracement of the beakout leg. Use the level that's confluenced with a supply demand zone. Stop is at the highest high or lowest low of the reversal pattern. Take profit is set at -27.2% or -61.8%. If your entry is at 61.8% and target is at -61.8%, you'll have a >3R trade. At least, you should have 1.5R if your entry is on 50% and exit is on -27.2%.

5. The only holy grail is you know a congressman/woman or Trump. Otherwise, you should accept losses.

It seems complicated but it's really not. It shouldn't take you more than a minute to do these steps.

Let's see some examples.












It's enough to explain the strategy. Let's get started.

Congratz on your new thread. Watching.

For GU it looks like 5 and 1 minute charts, standard MACD settings, and Fibs for measured move targets. High / Low selection is independent of trading sessions. Red news not a factor. Using TV platform. What do you recommend for S/R Levels?

Instead drawing pre-defined S/R levels, we let market tell us where the levels are because market is always right. What can slow down momentum? Important levels. So, if we spot a divergence on the oscillator, there must be an important level nearby. If the level draws enough attention which means a good chunk of order flow comes to the market, we must get a broken reversal pattern and that's when our game starts.

[quote=zkchyo;15300301]{quote} Instead drawing pre-defined S/R levels, we let market tell us where the levels are because market is always right. What can slow down momentum? Important levels. So, if we spot a divergence on the oscillator, there must be an important level nearby. /quote]

That's interesting. I never looked at divergence being caused by approaching a S/R zone. I will have to look for that. Thank you.

Currently I plot todays dynamically updated High and Low (HOD / LOD) (Black), the previous days HOD/LOD (Brown), the Weekly High / Low (Red), and 000 round number levels (Blue).
It can be argued that the market hit hard resistance and support at those levels, because that is where order flow dried up, so therefore they are valid S/R.

What do you typically plot? How long do you keep those levels valid?

Yea, those levels attract order flows. I don't plot levels because I like a clean chart. What I do is to look left to see if price has a first test on a level within a HTF peak/valley when pattern appears. What can confirm those levels? Oscillator divergence. We know oscillator divergence means a slown momentum. Why momentum is slown? Because there's an important level nearby. Then, how to find historical good levels? There must be an oscillator divergence in historical data. Let's talk about relations between order flow and this pattern. Within this pattern we have a fakeout. Fakeout usually triggers one side of stops and it generates order flow. If order flow is strong enough, we will have a break of structure. What we do here is to find a supply/demand zone that triggers break of structure and trade it. This pattern offers a great opportunity for scalping, too. Market will give you a bounce there.

A little trick - Zone reduction

Sometimes you have a nice entry zone on H1 but the stop is too big. You could go to LTF and look for the same pattern around your entry zone. Generally, I prefer 15m. Any timeframe higher than 15m, I'll apply this trick. You could also play 2 tp. one targets LTF's -27.2% or -61.8% and B/E, then rest targets HTF's -27.2% or -61.8%.