iNSIDER: Strategy “Trading the failure of candle patterns”

More training materials can be found here: https://bit.ly/38TgFm2

As you all know, candle charts and patterns may not always be the ideal scenario. But even then, not everything is lost. Sometimes we can learn a lot about the market and its participants, even if the formation is not working. This week in the section of trading subtleties I decided to shed some light on what we can learn in such situations.

How can we take advantage in case a certain price action signal is formed, but the subsequent movement is in the opposite direction of the signal bar. The idea itself is very simple. Once it becomes clear that a lot of bull or sword candle, such as dojo or hammer does not work, you need to keep in mind where the market will go next. This is pure market psychology. It is about determining the levels where the stop loss (or the so-called beam of stops) of trapped traders is located. With this clear goal in mind, you already know where your potential “target” is. At the same time, the level of the stops is relatively easy to detect – a level where the price should not go if the analysis is correct, ie. if the spark plug is executed correctly. You don’t have to think too much about where the perfect input will be, although maintaining a good risk / return ratio is paramount.

A good example of this is the so-called “Shooting Star” price action signal. If after the formation of such a candle the price should go down, but it does not, we take advantage of this by looking for levels to buy. Our goal will be the liquidity that is above the candle, ie. where the stops of the “captured” sellers are located.

We see the formed signal bar on the daily chart of WTI, after which the price should fall the next day. Instead, we have consolidation for the next two days. The price found resistance on 62.10, before rising and “picking up” buy stop orders above the top of the candle and the resistance at 63.30. How can we take advantage of this failed price action signal? The first real bullish signal comes on the H1 chart, when the price breaks the short-term trend line on the second day. The option here is to buy on the breakthrough or test of the area, by placing a short stop just below the candle that led to it.
In both cases, the target is above the top of the signal bar on a daily chart around 63.30, which happens on the third day.

There are some good levels for positioning in this setup, let’s look at them in the chart:

This type of strategy requires unconventional thinking and a lot of logic. But the idea is actually simple: If the market fails to do what it should, then just do the opposite.

More training materials can be found here:        https://bit.ly/38TgFm2

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