Just as Anti-Turtles is not the only price action pattern, Shark and 5-0 are not the only graphic configurations that are part of the harmonious trading system. The list of these technical analysis types is quite extensive, and they overlap with each other. How can it be any other way if harmonious trading is a combination of patterns and Fibonacci ratios that allow you to identify potential reversal zones with a high probability?
In previous materials, we studied in detail the 1-2-3 pattern and even described the 10-20-50 rule used as a filter for increasing trade efficiency. Let me remind you that the last number (50) represents the rollback level, at which the correctional extremum can be located. The American approach assumes that all patterns with a rollback of less than 50% are not usable. In fact, the range of 38.2% -50% reveals the Bat pattern. Although it is used quite differently.
In my opinion, the market is not as harmonious as theorists of this technical analysis area are trying to make us believe. Therefore, it makes no sense to look for ideal patterns. A simplified approach involves studying the relationship "correction level - target".
It should be understood that any method is of a probabilistic nature. There are more chances of a rebound from the target than of overcoming it. However, a successful test of the convergence zone should not be ruled out. In order to protect yourself from it, you should always set protective stop orders.
In the case of the Bat pattern, we are talking about a 38.2-50% rebound of the XA wave and a target of 88.6% of the same wave. Simply put, at a given correction level, we will expect a rebound when the quotes reach the convergence zone near the 88.6% mark. At the same time, as an example with the four-hour EUR/CAD chart shows, opening short positions solely by the rules of harmonious trade would be extremely risky. The quotations have rewritten the extremum more than once before changing direction.
If a trader is proficient with the price action tools, they can easily determine the entry and stop order points. In this example, the breakout of the auxiliary trend line drawn through the correctional lows of the Three Little Indians pattern became a signal to open a short position. The stop signal is located above point 3 of the 1-2-3 pattern. A return to this level will increase the risks of the euro's continuing journey North against the Canadian dollar.
Exit from short positions also should be identified using previously studied models. In the example with the EUR/CAD, after a few bars the Wolfe Waves – a strong reversal pattern - began to form. The fall of quotations to the sweet zone allowed the trader to take a profit of more than five figures. Profit factor exceeded 3. Continue reading with Litefinance.com...