Strategy Based On Chart Pattern

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fatdog1
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Postby fatdog1 » Wed Jun 21, 2006 10:01 am

Short trade on GBPUSD goes all the way back to the day's low:

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fatdog1
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Postby fatdog1 » Wed Jun 21, 2006 10:48 am

GBPUSD moves past the area of support which is why I only trade the
first pullback to support.
When the sellers are in control which you can see by the market making bear flags instead of bull flags, the areas of support are speed bumps.
Remember the GBPUSD has entered a stage 4 decline on the daily and weekly charts.


fatdog1
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Postby fatdog1 » Wed Jun 21, 2006 10:58 am

I guess the trick with the screen shots is to use a small workspace as a way to make the picture sharp.

Here is a comparsion of the USDCAD to the @CD.
Both are near areas of support for @CD and resistance for USDCAD.
Sometimes they seem to wait for the one to catch up to the other before the move happens.



jhtumblin
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Postby jhtumblin » Wed Jun 21, 2006 10:29 pm

fatdog,

I was wondering how you pick your equity to trade. Are you manually scouring charts on different timeframes looking for the formations or do you have a more efficient method?

The flag pattern has been around for quite some time (also known as pennants, using volume as the pole). A drawback that concerns me is that this method doesn't give you an entry until after the equity has already moved great distances. I personally would find it hard to sell into weakness and buy into strength. Do you couple this with other models to capture more of the move or just trusting that the wind doesn't change the flag's direction?

Ali Son
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Postby Ali Son » Thu Jun 22, 2006 6:27 am

Fatdog1,

Were these fully functional workspaces you provided? The workspaces that you provided earlier had all the indicators, moving averages and all the trendlines (in the @ym workspace) deleted! Am I missing an ELX or something? Please advise as I'd like to evaluate your approach.

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Postby fatdog1 » Thu Jun 22, 2006 8:34 am

Hi jhtumblin,
Here are the answers to your questions and an explaination of what I am trying to accomplish.

fatdog,

I was wondering how you pick your equity to trade. Are you manually scouring charts on different timeframes looking for the formations or do you have a more efficient method?


I am looking for a more efficient method. I am trying to code a strategy
that will buy a breakout of a flag pattern and also buy the pullback to that breakout area again in the future by modifing the DarvasBox strategy code to only buy a breakout if there is a flag pole before the congestion area of a bull flag. Same with only shorting bear flag congestion areas with a flag pole as a condition for taking the short.

In addition, I want the DarvasBox to then extend the top and bottom of the box to the right and buy the first pullback only to those lines with the same conditions as the original breakout trade when the price revisits that area in the future.

The flag pole breakouts will cut down on the number of losing trades that the DarvasBox takes.

For now, I manually scan charts starting with weekly and daily charts and put horizontal lines on the chart near the areas of old bull and bear flags to trade pullbacks to these areas when price revisits those areas in the future. It turns out that the flag pattern has another use that no one has seemed to noticed.
These areas are the support and resistance areas which will cause market turns when they are revisited in the future. Not only that but the flag patterns on smaller time frames will do the same thing.
This is the basis for everything I do.

I can provide examples to you on anything you trade in advance of price revisiting these areas.
If you have the latest version of Tradestation, I can post a workspace with the horizontal lines on it indicating the major areas of support and resistance for that equity or future or currency. You can watch what happens when the price revisits those areas.

"The flag pattern has been around for quite some time (also known as pennants, using volume as the pole). A drawback that concerns me is that this method doesn't give you an entry until after the equity has already moved great distances. I personally would find it hard to sell into weakness and buy into strength. Do you couple this with other models to capture more of the move or just trusting that the wind doesn't change the flag's direction?"

This method does not give you an entry until the equity has moved quite a bit as it is currently used. I want to buy the breakout of a congestion area that has a flag pole indicating direction on a smaller time frame like a 5 minute chart or a 15 minute chart.

Look at this mornings rally in the mini Russell. I am going to post 2 sets of screen shots using bars and candles.

The bar chart shows the first bull flag on a 15 minute chart and a higher bull flag which I have indicated with arrows.

I would buy both breakouts and pullbacks in the future to those breakouts. I also highlighted the first bear flag with a red arrow.
That is where I would exit the long trade.

What you can't see in this first picture of the chart is the area of resistance from 6-18-06 that stopped the uptrend yesterday.

There is a bear flag between 697 and 701 that formed on 6-18-06 and 6-19-06.

That area of resistance is what caused the new bear flag to form.

I posted that screen shot of the bear flag from 6-18-06 next.

I will start another post with the candle screen shots.



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Postby fatdog1 » Thu Jun 22, 2006 10:25 am

Now we look at how this all looks on a candle chart.

I am going to introduce you to the upstair and downstair pattern and the 4 stages of the market theory.

I am also going to show how you can see the patterns as they forms as if you were watching the construction of a new house if you know what to look for.

Screen shot number 1.

On the 5 minute Russell candle chart, notice how there is a small upstair which is what I call this pattern right before the Russell takes off for the day.

All day long new upstairs are formed as the Russell climbs.
These are areas to buy pullbacks to if you want to join a move that is under way and if you miss the first actual breakout.

Until the first downstair forms.
That is a way I use to determine when the up move has ended.

What you can't see on this picture is the opposing downstair to the left of the new upstair that has to be removed or absorbed just like the contractor has to clear the land before he starts to build.

That is what causes a vertical move to become a horizontal move.

This is where I will introduce the 4 stage method to the discussion.

The 4 stage method is from Stan Weinstein's Secrets For Profiting In Bull Or Bear Markets book. He says that every equity has a life cycle.

Stage 1 trading range bottom. (avoid since this could last a long time)
Stage 2 up trend (buy the breakout and pullbacks to the breakouts)
Stage 3 trading range top (avoid since sellers could assume control)
Stage 4 downtrend (short breakdown and pullbacks to the breakdowns)

Screen shot number 2.

I have a screen shot of the daily USDCAD showing stage 3, 4, and 1.
Again this 4 stage cycle is also visible on smaller time frames as well.
See how long the stage 1 trading range has been forming which is why Mr. Weinstein says to avoid them.

Back to screen shot number 1.

When the Russell enters a "stage 3 trading range top" yesterday afternoon on the 5 minute chart, and then breaks below the low of the trading range, it made it's first downstair or bear flag which indicates that the sellers are now in control.

At that point, I will exit my longs.
If I am scalping on a 5 minute chart, I will switch to shorting the first pullback to the first downstair especially if I know we are near major resistance which I have determined we are.

If I am swing trading, and have a profit from the long locked in, I will wait to see who wins the battle on the higher timeframes.

You can watch this yourself today since you now have an idea of what to look for.

The reason the move ended yesterday was the Russell ran into the bear flag or downstair from 6-18-06. That caused the Russell to move sideways or horizontal just below the downstair as it tried to absorb the sellers in that area. Depending on the outcome of that still ongoing battle, the Russell will either move higher or lower next.

Screen shot number 3.

Lets look at the 60 minute chart from this morning for some clues.

It is possible the Russell will trade in a tight range today between 695 and 701 as the sellers or buyers are absorbed and then move higher or lower tomorrow.

That is because the pattern on the 60 minute chart is a newly forming bear flag with a big flag pole from yesterday afternoon sitting on top of a big bull flag pole from yesterday morning.

You can see both the bear flag that cause the uptrend to end yesterday, and the newly forming one on the 60 minute chart.

The overall trend is still down, and the downstair between 698 and 701 is large on this higher timeframe.

There is a trading range bottom that the Russell would have to break below at 695 before I would start to short as a swing trader.

I will then switch to shorting pullbacks to downstairs if the Russell starts making them on the higher timeframes like the 30 and 60 minute charts.

There is another example on this same chart to make note of.

I highlighted with arrows the first and second pullbacks to the downstair below at 690 and the results of those pullbacks as an example of what
can happen if the Russell does drop in the next couple of days.



.

fatdog1
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Postby fatdog1 » Thu Jun 22, 2006 10:37 am

Ali Son wrote:Fatdog1,

Were these fully functional workspaces you provided? The workspaces that you provided earlier had all the indicators, moving averages and all the trendlines (in the @ym workspace) deleted! Am I missing an ELX or something? Please advise as I'd like to evaluate your approach.


Ali Son,

Best I can do for you is post a workspace with horizontal lines on it since that is all I use to trade.
Post your favorite stock and I will send you a workspace.
The DarvasBox code eld should work.

Ali Son
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Postby Ali Son » Thu Jun 22, 2006 11:46 am

Well to be specific, when I uploaded your workspaces I got the following messages for example: "AA-PR MACD K MA 2 [and 3 actually] deleted," "AA-FUTS-VOL4 deleted" and "Trendline SE 5-13-06 deleted." This is usually an indication that the ELD was not uploaded before the workspace. So, that indicates in the original workspace there were other indicators, whehter used or not; that was the confusing thing.

So, how do you draw the trandlines then if you do not have them as an ELD? I tried to look under Format Analysis technicques but there was nothing there.

Also, is there a way for me to turn off or better control the alerts en masse on the trendlines that did remain on the charts, rather than one at a time?

If you like you can send me an additional workspace for the 60 MINUTE EURUSD AND RIMM if you think that answers my questions or better clarifies/resolves everything.

Thank you for sharing. Hope we can help you out with ideas and coding.

You can PM me here OR on Tradestation forum OR better yet send to alison3cpo@yahoo.com (or if you need more room I can send you my comcast email too.)

And, Kudos overall! I like your methodology and am familiar with Weinstein at a rudimentary level from various articles and synopses, though I'm not sure how you draw the trendlines. I definitely think this technnique combined with Darvas or another congestion recognition technique is worth purusing as a methodology.

aka OPTIONSWINGS on Tradestation Forums. :)

Ali Son
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Postby Ali Son » Thu Jun 22, 2006 12:06 pm

One thing that is missing from your work and might be able to improve it are time projections. Those who use them, use them well to know when a breakout will occur. I've only become familiar with Darvas boxes in the last two months, but perhaps you are using them to fulfill this purpose?

This methodology seems to work with the fractal nature of price, as judjing by your charts (and if I am not mistaken you said it works with all time frames). That's great. But, what timeframes do you usually trade in and for what instruments...5 minutes for scalping in general? And?

Great Charts by the way, Fatdog. Have you traded this methodology for a long time, or is this a recent development?

-OS

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