We study the features of the formation and use of the model
The market is war. The struggle between the “bulls” and “bears” on Forex does not stop even for a second. And when it would seem, the situation is under the control of some, the initiative can easily pass into the hands of others in a matter of moments. On the chart, this most often manifests itself in the form of a bar, the body (spread) of which completely covers the body and the shadows of the previous one. In the candlestick analysis, this pattern was called “Absorption”, in the price action, you can often hear about the Outer Bar.
The model can occur both in a pronounced trend and during consolidation. It cannot be unequivocally attributed to patterns of continuation of a trend or a reversal. Everything will depend on the direction in which the market will go after the takeover. An external bar is considered to be especially effective, which is formed near important support/resistance levels, while there is an increase in trading volumes.
In the USD / JPY example, for the month and a half since mid-September, three Absorption patterns appeared on the daily chart at once. The first two of them were characterized by an increase in the volume of operations on the second bar, in the latter case, this was not. If you use the principles of VSA analysis as a filter, then playing the third External bar did not make sense, which was ultimately proved by the market. I draw your attention to the fact that all models have shown themselves near important Pivot levels, with which the trader could correctly identify key resistance.
The classic approach to the “Absorption” pattern involves placing pending orders at the maximum level of the second bar of the model – for purchase, and at the minimum level – for sale. Thus, the strategy for working on the Outer Bar does not differ at all from the strategy for working on the Inner Bar: the trader does not know which way the market will go, but must be prepared for any scenario. A protective stop order is placed on the opposite side of the pattern.
In the example with USD / JPY, the first two graphical configurations showed themselves well, the third stop order worked. However, as we noted above, monitoring the trading volume would allow the trader to avoid a knowingly unprofitable transaction.
In order to open a position with more confidence, it makes sense to switch to a lower time interval using the “ Two screens of graphic models ” system. As you know from the blog materials devoted to it, simple patterns on the higher time frame often correspond to more complex models on the younger. The classic approach involves the use of the following time combinations: daily – hourly, 4-hour – 15-minute, hourly – 5 minute charts.
In the case of USD / JPY, at the turn of September and October, the External bar appeared on the daily chart, and the “ Three Indians ” reversal pattern appeared on the hourly time interval. As a rule, the pair quotes return to the level of the previous extremum (the second “Indian”) as a signal to open a position. In our case, short. An important nuance is that the entry point corresponds to the Pivot level, a successful test of which indicates a breakthrough of support.
Thus, the popular price action patterns begin to play with new colors, if a creative approach is added to the trading strategy. Using two screens of graphical models allows the trader to win back their combinations at different time intervals, receive confirmation signals and enter the transaction with greater confidence.