Apparently there is some confusion, where this really need not be the case. In fact, it is so simple that it becomes hard to explain. Let me try anyway.
Here is the picture again:
This picture combines two things in one, namely a) the further the next candle intrudes into the range of the LRC (Long Range Candle) (aka pullback), the weaker the combination of the two becomes, and b) depending on where you define your S/R, you could increase the money you risk. The further price penetrates, the less extra you should risk, becuase the combination of the candles becomes weaker.
Re. b): the principle is to start with a risk of X pips in the morning. You gain e.g. 3X Pips, that you then can invest again. You play the money you gained in the market, in other words. In case you lose, you are back at 0. In case you win and make another RR of 3:1, you have 9X at your disposal.
The picture is related to this. It is also related to how severe the pullback is. The further the pullback, the weaker the case for a continuation of the previous direction, in the case of the picture to the upside.
In the extreme case it closes lower than 0%, in which case you want to look for trades in the other direction. In other words: you want to see a pullback that is as small as possible for a continuaton of the previous direction. The smaller the pullback, the more extra you can risk.
The S&R lines are personal choices. They don't differ from what are considered to be "normal" S&R. The truth of the matter is, that everybody will draw their own S&R lines. Whatever you do, it is subjective. At the end of the day, they are but lines in the sand; an objective limit where you base your decisions on. Price closes above or below any horizontal line you draw, no matter where. You act according to your defined rules in those cases, again and again.
The picture is related to a continuation to the upside (long). In case price does NOT close below the line in the sand, you add money proportional to the success rate of a pullback. The further the pullback, the lower the successrate, the less extra money you should add.
FYI here are a couple of pictures that are also related to this issue as well as the custom candles. All of this, my friends, is old wine in new bags.
Remember: a candle is just a candle. Price is fractal: two or three or Y candles are also just a (as in: one) candle. Take the open, high, low, close of any group of candles, and think of what it depicts: are the sellers in control, are the buyers in control, or is it neutral. Take the open, high, low, close of a particular timeframe, and you can draw a candle.
Hope this helps, and don't forget to go and search for yourself for the answers. You need to take responsibility of your life and therefore of your trading
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