Price Action & Patterns The PLTfx Way For 300 Pip Winners
June 2, 2016
Looking For The One
Nearly every day we get emails from new traders that go something along the lines of this:
"What is the one thing you rely on the most for your trade ideas?"
"What one thing makes your trading so profitable?"
"What is the one thing I should focus on to improve my trading?"
You get the idea.
The big problem that a lot of new traders have is that they are obsessed with the idea of profitable trading being the result of just one simple action. These guys dream of "discovering" that one unique method that will help them beat the markets, or "mastering" that one special technique that will unleash a tidal wave of wealth and sadly trading just isn't like that.
Internet marketers and unscrupulous brokers both perpetuate and feed on this idea, suggesting that consistently profitable trading can be accessed as easily as the fitness gurus who promise "wash board abs in a fortnight".
In both cases the expectations are high and the disappointment is severe. If you think you are going to conquer this game by focusing solely on one thing, then you are in for a rough ride.
Great trading requires an ability to blend different elements to create ideas and identify opportunities.
Now, if we wanted to truly simplify our approach to trading into just one area we could say that we focus on price action trading and for those of you familiar with PLTfx you will know this is true, that our trading does rely heavily on price action.
However, saying that would be absolutely no help to you whatsoever because depending on who you’re reading or who you’re listening to price action can take on many different interpretations.
It’s All Price Action
The problem is that the term price action is banded around a lot online but generally it is a catch all term for all technical trading which doesn't involve indicators and this can include trend lines, patterns, candlesticks, breakouts and more. The reality is though that even indicator based trading is price action trading as all technical indicators are based on price action. So to really get to the heart of what it is that we focus on at PLTfx we need to be specific.
Two Key Technical Elements
Within the category of price action there are two key elements which we focus on the most when delivering our trade ideas.:
From our experience in the markets, this being our sixth year of sharing trade alerts, we have found that these two elements are the most important and the most profitable but specifically it is the combination of these two elements which we rely upon to deliver steady profits.
Whenever we identify an opportunity in the markets our bias is based upon a solid confluence between a high-probability price pattern and a strong reversal candlestick.
Neither of these aspects is more important than the other and we only trade based upon the presence of both.
Why use price patterns and candlesticks?
Market structure is a constantly shifting, dynamic environment but within this ever-changing landscape there are certain recurring patterns that we can identify, patterns which from our research can be exploited for profit based on their tendency to yield a certain outcome.
Candle sticks then represent the confirmation of the idea, the execution. The presence of a specific reversal candlestick at the completion point of a high probability price pattern gives us the green light to engage the market.
We aren't going to give you the history of candlesticks here and you all have access to google but essentially different shaped candlesticks tell us different things about market sentiment and what happened during that particular session and as such can alert us to a potential outcome occurring in the near future.
Our approach is simple. Identify high probability price patterns to form a bias and execute based upon the presence of a key reversal candle which confirms that bias. This approach has banked over 6000 pips so far this year alone!
Let's look at an example of a very recent trade we took that perfectly demonstrates just how simple yet effective this approach is.
We took a short trade in USDJPY two weeks ago which netted us a nice 300 pip winner to kick-start June trading.
The technical setup was a text-book PLTfx play utilizing a key harmonic pattern we focus on which was confirmed by the presence of a classic reversal candle which we used for entry.
The one to one pattern is an incredibly powerful and versatile pattern which we often use in our trading. The beauty of this simple pattern is the precision with which it allows us to capture key turning points in trending markets essentially entering at the point at which the correction to trend fails and the trend resumes.
The ABCD Pattern
The pattern is identified by the presence of two retracements of equal length. Often in trending markets you will find that retracements tend to be at or around similar length to each other and this constant symmetry is highly exploitable and offers the opportunity for fantastic with-trend entries.
Combining Patterns With Price Action
The first part of the process then is simply identifying the pattern. Once we have identified a clear pattern within a trending market we then wait to have our bias confirmed by the presence of a reversal candlestick.
This part is key. Waiting for a clear candle stick signal is essential to success with this method and many traders who rely purely on patterns alone find that they're performance suffers consequently. We never know if a pattern is going to play out or not and simply trading on the presence of a pattern can be an extremely volatile way to trade.
The pattern suggests to us that a certain outcome is likely, in this case, the presence of a bearish ABCD pattern within a bearish market suggested a reversal lower but the presence of the bearish Pin Bar candlestick which is a key candlestick we use, gave us confirmation to take the trade.
Now again, nothing in trading is certain but the brokers spread and just because we've identified a reversal candlestick in confluence with a particular price pattern doesn't guarantee success but we have found that consistently taking trades only when these two elements are aligned ensures that despite what happens from trade-to-trade, in the long run we are always successful.
Another key harmonic pattern which we use in our trading is the 5 – 0 Pattern.
The 5 – 0 Pattern
The 5- 0 Pattern is similar to the One to One in that it uses the relationship between two retracements of equal length but in this instance, the second retracement is to complete into the 50% retracement of the BC leg. The beauty of this pattern is that it also incorporates nice structural confluence as the 50% retracement lines up with broken XA low. (for the bearish pattern) and the broken XA high (for the bullish pattern).
This confluence establishes a powerful potential inflection point at which we can look to engage the market. The confirmation to take the trade once again comes by way of a key reversal candle such as a bearish pin bar or bearish engulfing bar.
Here is an example of a trade we took last week in the AUDUSD which netted us a 140 pip winner.
Here you can see exactly how the symmetry swing completes into the 50% retracement of the BC leg, with added resistance coming from the broken XA low. The Pin Bar candlestick gave us the final confirmation for entry to this trade.
This method of using the identification of key patterns to highlight trading opportunities, which are then confirmed and executed upon the presence of key reversal candles is a powerful combination which has helped us deliver over 6000 pips so far this year alone.
June Alerts are currently up 476 pips.
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