Here is another great article from Al Brooks with ‘walk-through’ examples how to use price action with various types of trendlines.Copyright: Futures Magazine
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My EURUSD long from the morning has reached my profit target and indeed I booked the profit. Bought at Bar1, closed the trade at Bar2.
I cannot hold myself to quote Al Brooks on this trade. “Typically, entries in trend pullbacks look bad but are profitable, and entries in reversals look good but are losers.”
“The single most reliable Countertrend trade is entering Countertrend to a pullback, which is a small trend in the opposite direction of the major trend. Once the pullback traders have exhausted themselves and the trend traders have again demonstrated their resolve by breaking the trendline that contained the pullback, any small pullback to test this breakout is a great Breakout Pullback entry. This entry is counter to the trend of the pullback, but in the direction of the major trend, and will usually lead to at least a test of the major trend’s extreme. The more momentum that is present in the trendline break, the more likely it is that trade will be profitable.”
Al Brooks is writing about two breakouts in this method. The first is a larger countertrend move against the underlying trend. This can be a few bars on the 5 minutes timeframe that he is trading. The second is a small pullback when the trend resumes and the countertrend move’s trendline is broken. This minor pullback can happen within one bar and in my experience rarely happens more than three bars later than the breakout. If it does than the break is likely to be a false one.
It all sounds clear and easy but when trading in real time at the hard right edge it is not so simple.
Why am I quoting Al Brooks when his focus is 5 minutes timeframe? Because due to the fractal nature of the financial price movements (self-similar in scale), the same method can be traded on longer timeframes as well.
The EURGBP formed a Barb Wire formation on the 1h timeframe after a pullback from the 4h channel resistance. I prefer the upside from here based on my note posted on 2010/12/06.
Barb Wire pattern, by Al Brooks, is a tight trading range near the EMA with small body bars that “largely overlap and one or more of them have a tiny body (doji)”. Sideways bars with overlap mean that neither the bulls nor the bears are in control. Even though “odds favor a With Trend breakout” the Barb Wire pattern “is notorious for sharp whipsaws and repeated losses for breakout traders”. Quotes from Al Brooks’ book, see my Bookshelf page for reference.
[…] A price action trader rarely enters on a breakout to a new swing high or low because they’re always looking for the earliest possible entry to minimize risk. This usually means entering on some minor pullback before or after the breakout.
For example, if you just bought a flag breakout before a new swing high, sell part of the long to the breakout traders who are getting long at the new high. Don’t buy at a price where people are taking profits on their longs because then the risk of failure is too great; too large a stop would be needed, and you would have to trade fewer contracts, limiting flexibility. […]
[…] Two of the most reliable entries are failed breakouts and breakout pullbacks because both involve trapped traders who will be forced to liquidate and move the market in my direction. […]
[…] Second attempts are especially reliable because the market is always trying to do something twice. If the second attempt fails, the market will usually try to do the opposite. That is why so many pullbacks have two legs. The market is making a second attempt to reverse and when that second attempt fails, the countertrend traders liquidate and the trend resumes. […]
[…] The second-attempt tendency also explains why a trend reversal through a trendline is usually followed by a test of the old extreme. If the test fails to resume the trend, the trend will try to go the other way, and it usually will make two attempts in the new direction, forming a two-legged correction or even a new trend.[…]