I present one of the input signals for which I pay attention during my trading. It is quite popular in its basic version, so I decided to present it. I recall that it is part of a larger strategy and independent use of it, does not lead to miraculous results. You need also to consider exit signal.
In this example, the H1 is traded timeframe, and the entry timeframe is M10. Currency pair, which we will investigate, is EURUSD. The values of indicators are chosen based on observation and they are not some "magic" numbers. Signal is the observation of double bottoms, but rather breaking local lows and later its successful test. This is not a trend reversal signal, but signal of end of correction and trend follow-up, in contrast to the classic double bottom. It must meet the following conditions:
- we have quite a long, stable upward trend;
- market has made significant correction, i.e. outstanding against the former, which is higher than the average pullback;
- correction does not exceed 61.8% retracement of last swing;
- first bottom falls on the technically important level (whether it is a grouping of retracements or anything else, just consider this as important);
- first bottom on traded timeframe appears with the entry into oversold zone of oscillator (stochastic here, but it can be any);
- second bottom on the traded timeframe is outside the oversold zone of oscillator;
- second bottom is determined by the market at a lower volume than the first bottom on traded timeframe in datafeed of at least two brokers;
- entry timeframe both bottoms show significant bottoms in the oscillator.
Chart 1, Approaching the market for the second test level of 4560 (H1)
As you can see this is a specific input signal on the bottom test, which is set by the correction, quite popular, except that here I was trying to describe it accurately. There are several methods of opening the position:
- on next candle close after that candle, which determines the second bottom on the traded timeframe;
- after first pullback of the second bottom on the entry timeframe.
Chart 2, At this point, the position should already be open.
The first option is quite conservative, but gives greater certainty. The second will give us a generally better price, but may generate more false signals. A stop-loss, depends on the specific strategy, but there are a few options:
- conservatively below the first bottom on the traded timeframe;
- below the second bottom on the traded timeframe;
- 78.6% retracement of swing between the two bottoms.
Chart 3, Market further development on the hour interval.
Of course, in case of a volume adjusted double top everything is the exact opposite. So I decided to call these formations because they are quite similar with classic double bottom/top, but occur in places where it is more likely that they will bring us good results. Here is an example of 07.06.2011, EURUSD.
Chart 4, Market’s approaching for the test level of 4560 at the interval M10.
The first bottom was set at 20.00 GMT 06.06, second 07.06 to 2.00 GMT, so the entry signal has been generated between 4 and 5 A.M. Polish time. Omitting the opportunity to observe the market at this time, it is worth noting that the first 3 points are executed, only glancing at the chart. I do not show this on the charts, but the bottom is actually set in a fairly important technical point. Indications of the oscillator and volume also are suitable (from three brokers, showing only one). At the entry timeframe also looks quite good, you can see the differences in volume and in the readings of the oscillator.
Chart 5, Potential entry on M10 and the possibility of setting SL.
The first entry signal gives us the price of 4586, the second, which occurred a little later, about 4580. Stop-loss could be set at levels: 4555, 4561, 4566. As you can see, from the best entry to the best SL, we have only 14 pips, but more realistic is ascenario: 4586 <-> 4561, resulting in 25 pips. For me, it is quite good. Especially, I am interested in moves more than 40 pips, which I leave with a trailing stop. In this case the potential move could test the last top and is measures approximately 70 pips. How it worked out, everyone sees.
Chart 6, The effect on M10 interval.
Recall that this is not acting in itself as a signal. I encourage you to add your own filters and conduct research in this direction. I think it is one of market situations, which brings quite a good potential for the good trade or makes speculation simper in this specific type of correction.