After the market has drawn a letter “M” or “W” on the break of the resistance or support line (resistance on the “W” letter; support – “M” letter) trader should take an action accordingly to the market reversal direction.
Method 1 – Trend reversal “W “or “M”
After the market has drawn a letter “M” or “W” on the break of the resistance or support line (resistance on the “W” letter; support – “M” letter) trader should take an action accordingly to the market reversal direction. On a letter “W” – buy; on letter “M” – sell. Break is considered valid, when main body of the candlestick closes above or below the appropriate line. Please wait until the current candlestick is completely drawn and a new one started.
Take profit level is possible the same as the distance between support and resistance, added on the top of resistance line in the case of “W” letter. In the case of “M” letter take profit level should be calculated by adding distance between support and resistance to the support line, to the down side.
Stop loss in the case of “W” letter will be below the second dip of “W” letter and in the case of “M” – second peak of the “M” letter.
Method 2 – Trend reversal “M” or “W”
Method 2 is very similar to method 1. All stop loss and take profit levels are the same. Difference is just on the entry price. In method 2 after “M” or “W” has appeared on the chart trader should wait until price will come back to the broken line. In the case of “M” letter that would be support, in the case of “W” letter – that would be resistance. Rest of the trade remains the same as in the method 1.
Method 3 – Trend reversal – “Three mountains & Three rivers”
We took the name “Three mountains & Three rivers” from the Sakata’s five methods. In western terminology it would be “Head & shoulders” and “Reverse Head & shoulders”. We do believe that name does not make too much difference, but as long as we have candlesticks on the chart it is better to use Japanese charting terminology. On the drawings circled lines indicates buying or selling opportunities.
There is another opportunity for entering the market. On the point 3 trader should look for appropriate candlestick formation and take some actions, even “Three mountains or Three rivers” are not completely drawn yet. This opportunity involves a risk, but stop loss should be above the candlestick formation. In all cases trading with this method, stop loss will be above the point 3. Take profit should be at least twice the size of the stop loss.
Method 4 – Continuation Box
Box or range trading is probably most common trading method, and profitable too. On the drawings circled places indicates actions. This method is very simple and there is just one very important point. Box or range trading appears after the trend, and that important point is: entries must be made according to the previous trend. If previous trend was positive – look to buy near the support line. Stop loss is below support line at the distance approximately half the size of the Box. If previous trend was negative – look to sell near the resistance line. Stop loss is above the resistance and it is at the distance of the half of the Box size. Take profit would be a size of the Box added to the resistance or support line.
Method 5 – Channel
Channel is a very nice pattern to use in trading, but it appears not so often and trader must be very careful. Channel has it’s own specifics.
First of all, the steeper channel up or down, the more chances what opposite line will be broken and direction opposite to the channel could be very sharp, but mostly short lived. If the channel is closer to the horizontal line, break out from the channel will last enough long period.
Second thing is – it is risky to trade on the break of the channel in the same direction as the channel direction. Most likely it will be false break out. In the drawings circled places indicate actions. In the positive channel we buy near the lower line and take profit is the upper line. If price has failed to reach upper line and started to move down, trader should close long positions and on the break of the lower channel line trader should take short position. In all cases stops are placed below the previous dip or on the short side – above last peak.
In the negative channel all the actions are the same, but in the opposite order.
Description of the main Trading Methods, please view PDF file for more information with charts.