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Thursday 31 May 2018

Ross Hook Pattern Trading Strategy

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The  ross hook pattern  trading strategy is a 100% price action trading strategy that is based on the ross hook pattern setup.
There is no ross hook pattern indicator you are going to use here because all you need will be your eyes to be able to spot a ross hook trade setup when it forming and take trades accordingly.
Many forex traders, at first find it difficult to understand the ross hook chart pattern.
But trading the ross hook is easy if you know what a ross hook pattern looks like.   In this post, I will show you how to spot the ross hook chart pattern and also how to trade it.

WHAT ACTUALLY IS THE ROSS HOOK PATTERN?

So what is the ross hook pattern and what does it look like?
In simple terms, the ross hook pattern is a very slight variation of the 1-2-3 pattern.
This means if you know what a 1-2-3 pattern is, then it will be quite easy for you to understand the ross hook pattern.
So what are the 1-2-3 chart patterns?
Well, they are reversal patterns and they can be either bullish or bearish:
  1. The” 1-2-3 high” bearish formation &
  2. the “1-2-3 low” bullish formation.
See charts below…
Ross Hook Pattern Forex Trading Strategy
Where do you look for the ross hook patterns?
  • Look for 1-2-3 high formation at the end of an uptrend move where you expect to see the market move downward based on your analysis
  • look for 1-2-3 low formation at the end of a downtrend move…where you expect the price to  start moving up.

The Formation of 1-2-3 Chart pattern

Now lets talk about the 1-2-3 high pattern formation:
  • the point 1 is created when a previous upward movement end and price begins to move down. (the market has to be in an uptrend initially)
  • then price moves down to point 2 and then price starts to climb up…
  • price goes up to point 3 but that’s far as it can get and starts to fall down again.
  • there can be more than one candlestick (or bar) moving point 1 to 2 and again from point 2 to 3.
  • when it takes more than 3 candlesticks or bars to form a higher high/low, then this is congestion.
For the 1-2-3 low pattern formation, its the complete opposite of the 1-2-3 high pattern formation.
  • point i is created when a previous downward movement ends and price begins to move up (the market has to be in a downtrend initially)
  • price moves up to point 2 and then starts to go down…
  • price falls down to point 3 but that’s about as far as it can go and starts to climb back up.

WHEN A 1-2-3 PATTERN IS NULLIFIED

When a 1-2-3 chart pattern is formed, there will be times when:
  • price moves above point 1 for 1-2-3 highs
  • or price moves below point 1 for 1-2-3 lows respectively.
This means that the 1-2-3- pattern is no longer valid. See example below:
Ross Hook Pattern Trading

HOW DOES THE ROSS HOOK PATTERN FORM THEN?

This is how the ross hook pattern actually forms:
  • the ross hook pattern is the pattern that comes AFTER the  1-2-3  pattern forms. This means that the high or low of the 1-2-3 pattern must be broken and then the correction after that is what ross hook pattern traders look  to see if it is a ross hook or not.
  • this means that in an uptrend, you watch to see first that break of the point 2 (peak) of the 123 pattern and then wait for the correction.
  • the failure of the candlestick/bar to continue going up (which means price goes down again…a correction) creates the Ross Hook!
Ross Hook Chart Pattern Forex Trading Strategy
So in a similar but opposite, is the Ross Hook Pattern for a 1-2-3 high formation:
  • the ross hook pattern is formed after a breakout happens on the 1-2-3 high formation and a correction happens.
  • so in an downtrend market, the price will fall down past the low of point 2 in in the 1-2-3  high formation.
  • the failure of the candlestick/bar to continue going down (which means price goes up again…a correction) creates the Ross Hook!
If you don’t understand, keep going back and read slowly 2 to 3 times…then you will understand Ross Hook.

ROSS HOOK PATTERN TRADING RULES

Refer to the chart below which shows you how to trade the ross hook pattern:
Ross Hook Forex Strategy
Now, this if for the first 1-2-3 formation starting from the left (refer to price chart above)and here are some things to note about that:
  • the market is obviously in an uptrend as can be seen with prices moving above the moving average (the line in the middle and also moving close and within the upper bollinger band line.
  • at point 1, you can see that the market make a peak then on the next day, it falls, making point 2.
  • then a correction happens-price moves up with a big green candlestick but this candlestick fails to close above the high(or peak) of point 1.
  • so now you have an opportunity or signal to short(sell) based only on the 1-2-3 pattern using a sell stop order placed just below the low of point 2.
  • however on the 4th day, the candlestick does not fall below so any sell stop pending order place based on the 1-2-3 pattern anticipating a breakout will not be activated.
Now lets go to the 2nd 1-2-3 chart formation
The next few days, the prices inched gradually up and effectively made the first 1-2-3 pattern null and void because another high peak formed higher than the first point 1.
  • Then the next day  point 2 is formed and then on the 3rd day, point 3 is formed.
  • Price then inches up but fails to go above point 1.
  • the 4th day sees a big red candlestick making a breakout down past the low of point 2. If you had placed a sell stop order just under the low of point 2, it would have been activated.
  • that red candlestick forms the ross hook because on the next day, its an up day….a green candlestick forms.
  • now you know that ross hook has formed, so you place a sell stop order under the low of the ross hook anticipating price to fall back down and activate your sell stop order.
This are examples of sell trade setups but for buy trade setups, you just do the exact opposite.

ROSS HOOK PATTERN TRADE SETUPS AND EXAMPLES

Ross Hook Pattern Forex Strategy

That’s how to trade the Ross Hook Pattern.

TRADING RULES FOR ROSS HOOK PATTERN

  1. The ross hook pattern forms after the formation of 1-2-3 trading pattern.
  2. In the process of waiting for the Ross Hook Pattern to form, you can actually trade the 1-2-3 pattern breakout as well.
  3. The ross hook pattern is a breakout  trading strategy
  4. Once the ross hook forms, you can either place a pending order just above/below the ross hook pattern to catch a breakout when it happens or…
  5. Or if after the ross hook pattern forms you need to trail your pending orders above the subsequent highs that form (for buy setup) until price moves back up again and activates your bending buy stop orders.
  6. Similarly but opposite for sell stop orders: after the formation of ross hook, you can trail you sell stop orders under the lows of each subsequent candlestick that has a higher low until price falls back down and activates your sell stop order.

TAKE PROFIT TARGET OPTIONS FOR ROSS HOOK PATTERN

These are a couple of suggestions you can use to take profit based on the ross hook pattern setup.
  1. measure the distance in pips between point 1 and RH and use that as your take profit target level.
  2. measure the distance in pips between point 3 and RH and use that as your take profit target level.
  3. measure the distance in pips between RH and the Correction low (for a buy setup) and RH and correction high (for a sell setup) and multiply those pips by 2 or 3 and that should give your profit target levels.
  4. Or if you don’t want to place take profit targets then why not trail stop your trades by moving stop loss behind each peak or low point that forms as your trade moves in favour? In a good trending market, this will allow you to  ride the trend most of the way and lock in and capture many profitable pips.

HOW TO PLACE STOP LOSS AND TRADING RISK MANAGEMENT

  • Use the nearest peaks and lows for your stop loss placement. This way, you have less chance of getting stopped out prematurely.
  • Remember, Every trade you place has potential to be a losing trade. So practice prudent trading risk management.
  • In forex trading, you need to cut your losses quickly and and trade with acceptable risk like risking only 1-2% of your trading account in each trade.
  • In that way, you can always live another day to trade an increase your forex trading account.

Island Reversal Pattern Trading Strategy

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The island reversal pattern trading strategy as the name says is based on the Island reversal pattern.
It is a price action trading system.
Now, I don’t use this trading system but from my experience, it would be very rare to find this kind of pattern in the forex market because of its high liquidity.
But in the share market, you may have a chance of finding the islands reversal patterns.

What Is The Island Reversal Pattern?

Well, I’d better let the charts do the speaking and explaining.
There are two types of island reversal patterns, the bullish and the bearish pattern.
This is what a Bearish Island Reversal Pattern Looks like:
bearish island reversal pattern
This is what a Bullish Island Reversal Pattern Looks Like:
bullish island reversal pattern

How To Trade The Island Reversal Patterns

The trading rules are really straight forward.
Selling Rules:
  1. identify the bearish island pattern
  2. you can either use a market sell as soon as you see the bearish gap form or wait for that candlestick to close first then place a pending sell stop order as shown below.
  3. your stop loss should be placed on the other side of the bearish gap.
  4. for take profit, aim for 1:3 risk:reward or aim for the previous swing low.

island reversal  pattern trading strategy sell setup

Buying Rules:
  1. identify bullish island chart pattern
  2. you can use a market order or sell stop order as soon as the candlestick makes a bullish gap as shown on the chart below or wait for that candlestick to close and use a buy stop pending order.
  3. place your stop loss on the other side of the bullish gap.
  4. profit should be 3 times or more what you risked initially aim for the previous swing high
island reversal pattern strategy buy setup

Summary

As stated above, the island reversal patterns rarely form in the forex market but if you happen to see one, you may need to use this trading strategy to trade it.
One thing you will notice is that the stop loss distance are not “tight”.
The reason is because sometimes price has a tendency to move and fill the gap before going in the original direction and for that, the stop loss has to be placed on the other side of the gaps.

Inside Bar Trading Strategy

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The inside bar  trading strategy can be classified as a simple price action trading strategy that even new traders as well as veteran traders can use.

If you are a housewife  trader or somebody who does not spend a lot of time in front of your trading charts because of work, this may be the only  strategy you need as it can be a set and forget type of trading system.
The inside bar  trading strategy has not need for other  indicators as it is purely a trading method based on price action.
 Pair: Stock,Commodity, Currency
Timeframes: Preferably the 4hr and the daily timeframes
 Indicators: None

WHAT IS AN INSIDE BAR?

If you are wondering what an inside bar is, then here’s an explanation.
  • the inside bar is a 2 candlestick formation
  • the first candlestick that forms may be called the “mother candlestick”
  • the second candlestick that forms after the “mother candlestick” is engulfed completely within the shadows of the mother candlestick. That second candlestick is called the “inside bar.
Here’s an example of how  inside bar candlestick formation looks like:
Inside Bar Forex Trading Strategy System

Notice on the chart above:
  • the inside bar is completely engulfed within the the shadows of the highs and lows of of the preceding bar (or candlestick)
  • it is a two candlestick formation
  • the preceding candlestick can be either a bullish or bearish bar (candlestick).
  • the inside bar itself can be bullish or bearish candlestick.

WHY INSIDE BARS FORM?

Inside bars, when they form show a time period of  market consolidation. This market consolidation can be due to:
  • a time of indecision as traders are figuring out if they are going to buy or sell or not
  • a period of low trading activity (low trading volume)
  • it can also be a time where the bulls and bears of market forces are also almost of equal strength and each really don’t know what direction to take on their trades.
These are some of the reasons why inside bars form.

Where Do Inside Bars Form?

Well, inside bars can form anywhere. But the inside bars that are of significance that many traders take notice of must form on these level(areas) listed below:
  • support
  • resistance
  • pivots
  • Fibonacci levels
  • trend line touch areas
Its best to only pay attention to inside bars that form in the price levels listed above.

INSIDE BAR FOREX TRADING STRATEGY RULES

Selling Rules:
  1. the market must be in a downtrend.
  2. when you see an inside bar form, then place a sell stop order anywhere from 2-3 pips below the low of the inside bar. You do that soon as that that inside bar closes.
  3. For Stop loss, place it anywhere from 5-10 pips above the high of the inside bar.
  4. exit on the close of the third candlestick-your candlestick count should include the inside bar(which should be number 1). The chart below should make this concept clear.
  5. Or another way for you to  exit a  trade is to trail stop your trade and lock your profits as the trade moves in favor until price reverses and takes out your trailing stop loss and hopefully you walk away with a lot more profits compared to exiting on the 3rd candle:
Inside Bar Forex Trading Strategy
How To Trade The Inside Bar In A Downtrend Market

Buying Rules:

The buying rules for the inside bar trading strategy are just the exact opposite of the selling rules. Here they are:
  1. the market must be in an uptrend.
  2. when you see an inside bar form, then place a buy stop order anywhere from 2-3 pips above the high of the inside bar. You do that soon as that that inside bar closes.
  3. For Stop loss, place it anywhere from 5-10 pips below the low of the inside bar.
  4. exit on the close of the third candlestick-your candlestick count should include the inside bar(which should be number 1). The chart below should make this concept clear.
  5. Or another way for you to  exit a  trade is to trail stop your trade and lock your profits as the trade moves in favor until price reverses and takes out your trailing stop loss and hopefully you walk away with a lot more profits compared to exiting on the 3rd candle.
Inside Bar Forex Trading Strategy Buy Setup
How to trade the inside bar in an uptrend market

AN ALTERNATIVE WAY TO TRADE THE INSIDE BAR

There’s another way to trade the inside bar. It is when you really don’t care if price is going to go up or down. Its a non-directional trading system.
What you do is to place a pending buy stop and sell stop order on both sides of the inside barso if price goes up or down, one of this pending orders is sure to get filled/activated. Here’s how to do it:
  1. when you see an inside bar form, then you place a  pending buy stop order above the high of that inside bar and also place a stop loss below the low of that inside bar. You also need to place a sell stop pending order on the low of the inside bar and place its stop loss above the high of that inside bar.
  2. if one pending order is activated, you immediately cancel the other that has not been activated.
  3. For exit and take profits, you can use the techniques give above.
Inside Bar Forex Trading System
How to trade the inside bar when market direction does not matter

DISADVANTAGES OF THE INSIDE BAR  TRADING STRATEGY

  • false breakouts do happen and you will get stopped out as price reverses and hits your stop loss.
  • avoid trying to use smaller timeframes to trade inside bars, there will be too many “noise” and false signals.

ADVANTAGES OF THE INSIDE BAR  TRADING STRATEGY

  • pure price action trading
  • if you trail stop your trades to lock in profit as shown in the previous chart above, you can make a lot of profit if the trend is strong.
  • if you trade using the daily chart, you need only a few minutes each day to check your chart, place your pending order (when you spot an inside bar) and walk away. Check later during the day to see which pending order was activated then cancel the other that was not activated.
  • its a very easy candlestick pattern to spot, even a housewife who has no prior experience in trading stock can use this system and make money trading .

The Outside Bar Trading Strategy

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This outside bar trading strategy is a simple trading strategy and its easy to spot the pattern setup and and also has simple trading rules  which beginner stock traders can find easy to use.
The concept of the outside bar trading strategy is the same to that of the inside bar trading strategy but the pattern setup is the opposite.
Timeframes: 4hr and daily
Pairs: Stock,Commodity,Currency
 Indicators: None

WHAT IS AN OUTSIDE BAR PATTERN?

In order for you to trade this strategy, you need to know what an outside bar pattern looks like. The outside bar is a two bar(or candlestick) pattern.
The outside bar (or candlestick) is a candlestick that has its shadows engulf the bar(candlestick) before it.
What this means  is that the outside bar’s high and low overshadow or engulfs the bar before it. Now, the outside bar has other names too. It can be also called a bullish engulfing or bearish engulfing candlestick pattern.
Here’s what a Bullish Outside Bar Pattern Looks Like:
Outside Bar Pattern
Here’s what a Bearish Outside Bar Pattern Looks Like:
Outside Bar Pattern Bearish

OUTSIDE BAR  TRADING STRATEGY RULES

Refer to the chart below on how to trade the outside bar  trading strategy:
  1. Place a buy stop order if bullish outside bar and a sell stop order if bearish outside bar 2-5 pips above the high(if bullish outside bar) and 2-5 pips below the the low (if bearish outside bar).
  2. Then place stop loss in a similar manner on the other side, 2-5 pips away from the low if its a buy stop order and 2-5 pips above the high if its a sell stop order.
  3. Your take profit target, you have a few options: target previous swing high points (if its a buy order), or previous swing low points if its a sell order. Or 3 times your risk…say if you risk 50 pips initially, then you you should set your take profit target at a price level where once hit, will give you a 150 pips profit (3 times your risk).
  4. Trade Management: one of the best trade management technique is to use trail stop behind the low if its a buy order and above the high if its a sell order. You will get stopped out when a candlestick knocks out the low of the previous candlestick(for a buy order) or you will get stopped out when the high of the  previous candlestick is intersected for a sell order. At least you would walk away with a profit that you’ve locked.

Outside Bar Forex Trading Strategy
The chart above, show the trade setup for a buy order. For a sell setup, it will be the exact opposite.

DISADVANTAGES OF THE OUTSIDE BAR  TRADING STRATEGY

  • stop loss distances are huge (the larger the timeframes used, the larger the stop loss), which means you need to calculate lot sizes based on the risk you are willing to take.
  • sometimes it may take a while before you can start to see some profits on your trades. This is because,the outside bar has moved a great deal already, and the next 2-3 candlesticks may not move much distance like what  the outside bar did.
  • avoid trying to trade outside bar trading setups on on areas on chart that really have no significance. What I mean is is that you should take trades on outside bar when the chart pattern happens around support or resistance levels, Fibonacci levels, pivots etc.

ADVANTAGES OF THE OUTSIDE BAR TRADING STRATEGY

  • a simple price action trading system easy to understand and follow
  • he outside bar is easy to spot if that’s your focus and the trading rules are very easy to understand and implement.
  • you will notice that market has potential to move a very long way when these outside bars form and can bring you hundreds of pips if you ride out the trend and locking your profits by using trailing stops placed under swing high or lows as price moves in favour of your trade.