Archives for March, 2009
Red X marks the poke bar, the price needs to close below that in order for a 2b reversal short entry to be triggered, The stocastics were above the 80 level so it looked like the buyers had run out of steam.
Looking at the same setup using the fx500club indicators we can see the moving averages and the daily pivot were clearly acting as resistance above the price. Just an added confirmation that this 2b reversal setup was indeed a valid one.
13.15 on the 19th was the high of swing 1 and as such was the ultimate profit target for this 2b reversal long trade. The red x marks the poke bar between points 2 and 3, once the high of that bar had been broken that was our signal to go long. Strict 2b rules suggest we wait for a close above that bar but I generally look for a close above it using the lower time frame, in this case the 5 minute chart.
In an uptrend, if prices penetrate the previous high but fail to carry through and immediately drop below the previous high, the trend is apt to reverse. The converse is true for downtrends.”
[Vic Sperandeo in "Trader Vic: Methods of a Wall Street Master"]
The 2B principle gets its power from the large number of stop-loss orders in the area of the X. Many traders who bought the breakout will have their stop-loss orders there, so if prices fall below the blue line those stops will be hit, driving prices back down with thrust. If you enter a short as the breakout traders are bailing out of their positions, the burst of selling can propel your trade into the green so quickly that, before you can enter your stop-loss order, prices have moved far enough in your favor to set your initial stop-loss at break even. The inverse is equally effective for 2B bottoms.
Another name for the 2B is “spring.” Imagine the blue line in the graphic as a rubber band. The bigger the poke above the blue line, the stronger the reversal potential if the breakout fails. This same principle works on failed triangle breakouts and failed trendline breakouts. If you were unfurtunate and bought the breakout, instead of putting just a stoploss at the X, consider making it a stop-and-reverse. This pattern occurs at the tops and bottoms of consolidations as well as at major reversals.
below is the 123 reversal when the price fails to make a lower low or higher high and resumes the trend
1. trend line broken
2. lower high in an uptrend, or a higher low in a downtrend.
3. break below the previous low in an uptrend, or above the previous high in a downtrend
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Always Remember.
Keep your risk as a percentage of your capital low (1%), equals stress free trading.
Always work out potential losses before potential profits.
We are paid to take risks, if you aren’t in a trade you cannot win a trade!!
Buy off support and sell off resistance.
Bank partial profits early and move your stop loss to break even as soon as you can.
I am learning how to trade these setups and indicators across all time frames with the help of the fantastic team at the www.fx500club.com They have a live forex chat room and share their charts so that you can watch them find potential trades in real time.
They also have a school for learning how to trade longer term charts at www.fxmonkeyschool.com.
The fx500club and fxmonkeyschool, forex trading school don’t just trade charts and indicators alone, they teach us to use correlation of the whole market before entering a trade. It truly is the best place to learn how to trade forex properly, safely and profitably. It’s all about the pips and about protecting your capital.
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2b reversal and 123 reversal trading instructions
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