(Trading Tutorial ) How to trade using simple patterns

hey everyone Steven here with the trading channel and in today's video as you can tell from my awesome drawings of flags triangles and pennants we are going to discuss how you can use these simple price action patterns to create a strategy of your own that you can use in the forex market I've taken the liberty of writing down some steps that I think would be important to take while considering using these patterns in a strategy and those steps are always determine if the market is in trend or in consolidation and the reason this is important is because although these simple price action patterns often are forms of consolidation they are actually continuation patterns of an underlying trend what I mean by that is a flag pattern for instance is a pattern that forms after a large move up and the pattern itself is just a brief form of relief from the underlying trend so the underlying trend would be up the flag would be a brief form of relief before breaking out into new highs following the underlying trend so it is important to always determine whether the market is trending or consolidating because these patterns will not work quite as well when the market is consolidating and you can actually lose a lot of money doing that you want to make sure that since these are continuation patterns you are in trend when you trade them and this is a lot of the reason why these simple price action patterns don't work for a lot of traders is because they don't follow the first rule they don't follow that first step they always just trade every triangle every pennant and every flag that they see instead of waiting for the market to be in trend and trading based around that underlying trend so now that you have that information in hand the next step would be to decide what simple patterns you want to use do you want to just trade flags or would you like to trade flags and ascending and descending triangles and pennants so figure that out and once you have that decision made make some non subjective rules for trading these patterns whether you're going to trade an ascending triangle based on a breakout of the highs or you are going to trade the second support level created after a trendline is made for the bottom of an ascending triangle that would be an example of some of the rules you would have to pick between same thing with the pennants and also same thing with the flag pattern next write down those rules as you have created and the final step step 5 test and execute your plan alright so if all of this sounds pretty interesting to you then stick around through the intro and disclaimer make sure to subscribe if you're new click that like button for me and I'll be right back alright guys so before I get started diving into the charts looking for these simple patterns I'm going to go ahead and draw out on the chart in front of you some of the rules that I've come up with to trade these simple patterns that I think would be really helpful for you at least as a starting point and of course you can change any of these rules to anything that you would like you can use any indicators that you would like or you can use no indicators in no EMA and just base everything on lower lower closed higher higher closed candles which would also be a good idea testing this strategy but as a more simple and non subjective way to use this strategy I am going to use a 2-under dma what I'm going to do is just draw on the chart and we'll just pretend that this is the EMA it's blue line you see here okay so as for my strategy the way I've chose to make these rules what I will be looking for I'll use green for price action what I'll be looking for is a break above the EMA a pullback and a new high so before I even look for some of these simple price action patterns I have to see a new high after a break above our EMA so here we had a break above the EMA and now a new high so what I'm going to be looking for is any type of simple price action pattern from a flag to a triangle to a pin it and also any kind of wedge patterns so what I'll do here is just draw in a little flag pattern and this is what I would be looking to trade when seeing this kind of formation here the big impulsive move up that breaks previous structure after be after breaking above our 200 EMA I'll be looking forward to resistance levels to be created one below the other and I will use that as a basis for my flag pattern draw our flag pattern out here and obviously we would hope for a breakout to the upside of this flag pattern and I'll be using the same technique for pennants as well as you can see another break above a previous resistance level which is the first thing I'll be looking for using the rules that I've created for simple patterns is a break above a previous resistance level and then a pennant formation that broke out to the upside now as for triangles ascending and descending I can use this same way of trading after a break and close above previous structure which is what I'll be doing but instead of only being able to trade the breakouts from the upside on the a sending and descending triangle I have made a rule that states that I can trade an ascending or descending triangle as long as we don't break below our previous lows so here would be our previous lows or previous lowest lows and what I mean by that rule is that I can trade a triangle from any point between the lowest previous love here and the higher high so any point between there I can trade an ace ending or descending triangle and trade the breakout in the direction of the underlying trend there we would have a descending triangle towards the middle range between the lower the higher low and the higher high and trading the breakout of that would be appropriate according to my rules so now as you have an idea of what I would be looking for on the charts while trading these simple patterns we'll go ahead and go down to the charts of the Eurodollar over the past couple of months and see what we can find alright guys so now I will take you through the euro dollar chart of the last few days and show you some trades that could have been taken based upon the rules that we created earlier in the video the first thing that I did was just scrolled back the chart to the first place I saw that we have come down and touched d200 EMA which is here so once we've touched that 200 EMA according to my rules I'm waiting for a break above the 200 EMA see if we get it yes we do now I'm waiting for the creation of a high here's the creation of a resistance level and now according to my rules I'm waiting for a break above that resistance level little pullback here and still waiting on the break above we got it here and now we can start looking for some of those simple patterns a flag a pennant or a triangle pattern obviously here we have created new higher highs and here we have created a flag pattern our pole looking like this the resistance level being here for the flag pattern and our support levels being down here waiting for breaking close above we get it there now we place our art stops and targets obviously targets would be up stops would be right below previous swing low and targets would be higher than this but I would have to move the chart over and the whole point of doing this is to not see what's in front of you in chart so we got a nice target hit let's assume we're taking a one-to-one risk/reward and now we're looking for any other simple pattern because of the break above our previous resistance level here was our previous resistance level we obviously broke above it so now we wait on any kind of simple pattern there's another resistance level here from here now we can pull a black pattern from resistance to resistance and the poll would be from here not that it really matters but that's just how I've decided to draw these flag patterns out for you guys waiting for the break above you got it now stops again below our previous swing there and targets assuming we're taking targets at a one-to-one close to where they're at already obviously you can take much more than a one to one risk reward for your targets you can use extensions or inversions you can use an extension of your previous low-to-high here and down and take your targets at 127 a 1/4 1/4 or a 1 6 1 8 extension and you can also do what is called an inversion which would be from your swing low back to your previous swing high so we would take from swinging low up to swing high back down as you can see you could also then put your targets at a 127 1/4 1/4 or 1/6 1/8 also I have customized the extension tool to give me a 2 times any extension I draw so what this 2 in red up here is it's just 2 times this move from here up to here and that's a way I'm testing to take targets on some of these simple patterns but assuming we took a one-to-one here we have hit targets and are still looking for simple patterns we have created higher highs so we are in the process of looking for a triangle a flag or a pennant any one of you that are familiar with an ascending triangle will see that here we put in multiple resistance levels and higher support levels this is an ascending triangle and what we would do in this case is wait for a breakout only in the direction of the underlying trend which is up so we are only waiting for a breakout of our top line of the ascending triangle if this bottom line is broken then that is irrelevant to the process we're using here we have a break and close above our top line so stops go below the swing low and targets one to one or whichever type of target you choose and if we scroll forward you'll see that we would have hit targets there and now we've just kind of fallen off the edge here back down in previous support levels alright guys so now that we've looked through the charts and you've got an idea of how I would test these simple patterns what I'm going to do is go ahead and go to a couple of live trading examples that I took today using these simple patterns and the rules that we created for them today before we do that though I would like to encourage you guys to share your ideas in the comments section below this video if you come up with any other way to trade these simple patterns and to make them more profitable then don't hesitate to let us know in the comments section and also if you decide to test these patterns in the way that I've shown here today be sure to keep me updated and let me know what you've come up with so now we'll go to the live trading examples on a couple of New Zealand pairs alright guys so here we are on the New Zealand dollar five minute chart and a couple of hours ago we went short this pair because of a pennant formation that formed after an impulsive move down so what I'm going to do now is just walk you through some of the analysis that we did in order to get involved in that pennant formation you can see here that we have broke below our 200 EMA and according to my rules I need a rally which we get here break below rally and another lower low created and now if we scroll down we'll see that what we were looking for is a pennant or a flag formation and right there I already view this as a pennant formation you may ask why well because we've come down which put in a support level a resistance and a higher support at that point I see this as one of two things either a pennant formation or a descending triangle either way I want to trade this on a breakout of these support levels so I'll go ahead and draw in a line for those support levels and we can also draw in these resistance levels since this one here was created we can draw these resistance levels in and you see that we have a pennant now what we're interested in is selling the break below those support levels as you can see there this candle here we had a break below the support levels and once we came up to retest the line is when we went short and with a stop that was above our previous resistance and a target that was based on a one six one eight extension of our previous swing high down to swing love so that's where we took our first targets off and now we are still short half of our position waiting the continuation of the trend to the downside so if I just draw out over here to the edge of the chart what the market's done maybe it'll be a bit more clear I know this looks a bit messy so what we did was came down and formed a pennant formation at this point right here I know what I'm looking for I know that I'm looking for a break below these support levels why you might ask because we have just put in an impulsive move down in this second support level tells me that we are either in a pennant formation or a triangle formation and either way I want to sell the break of that support level so at this point I will be looking for a break below this level and I will either sell the close of that candle depending on how low it closes or the retest of that line and expect some sort of continuation to the downside and of course I'll be taking off one target one position at somewhere around a one to one just to ensure that I make profit on the trade and at that point moving my stop-loss to break even and then after that I'll be waiting on a lower low followed by a lower high and they break of that previous low in order to move my stop loss from here down to here and I'll follow that down until I've either hit my second target or become stopped out on trail stops so that's what I would look for before entering the trade and exactly what I looked for before entering this trade and that this is how I'll be managing this trade on my way down to second targets and my second targets will be based on an extension of the bigger most previous move which for me would be from this resistance level here down to support and back up and I will be looking for a 127 extension for my second targets and hopefully we'll continue to press down it looks to me that we are actually creating another another a sending triangle here in fact we are and if I was not already clearly in this trade this would be another trading opportunity I would be looking at but now that we've talked through that trade let's go over to another trade that we took today on the New Zealand yen in the same direction going short and we have also already taken first profits in the other trade as well alright guys so we sold this ascending triangle here as I said before in the rules that we stated earlier I am allowed to trade triangles at any point as long as I'm with the underlying trend we came up put in an ascending triangle and we sold the breakout here on this red candle on the new zealand yen 5-minute chart and after that we just did a 180 our stop after the close of this candle which was seven pips and you can see that here and for our reward I just wanted a little better than a one to one for today's example and as you can see we are pressing down now and getting pretty close to hitting our targets so hopefully this market will continue down and we will be taken out for our take profit and I believe I'm going to trade this with multiple targets today so here I'm just going to go in and replace that with two Lots instead of four so I'll be taking out four first targets here at that point I'll move my stop falls down to break-even and see if we can get some kind of trend continuation to the downside as you can see this market has been bearish for the past couple of days all right guys I'll go ahead and pause the video and I'll be back if we end up hitting targets or getting stopped out here on the three-minute chart you'll see that we've actually put in a descending triangle as well and broken through the support level of that descending triangle just a few minutes ago we'll draw in our support level here and our descending resistance here so with this being the case what we are expecting to happen here is after this impulse have moved down this period of brief consolidation in way of a descending triangle the break through this triangle and hopefully a considerable move to the downside to continue the overall trend in the market which is down and now we seem to be getting a little closer to targets here hopefully we will be filled as we come a little lower and there we go guys targets filled on the new zealand yen trade we filled the targets for half the position that we were in we had a four thousand unit position and now we are down to 200,000 units and we have now put a hundred and fifty dollars in the bank or stop has been moved to break-even and we're just waiting to see if this market continues to press down and trend continuation second targets are going to be down at previous structure and what I'm going to do is just as we break below the lows I'm going to manage this position by placing my stop-loss above the previous resistance for instance my stops are at break-even now but if we manage to get a little more of a close under this level then I will be managing the position by placing my stop above this resistance level and so on as the market continues to move down if it does in fact move down at all from this point so as we come down to my secondary targets all I'll be doing is taking my stop-loss after every breaking close below a previous low and moving it down to above the previous high breaking close below the previous low stop-loss above the previous high and that's how I'll be managing this position until we hit if we continue to press down towards target number two and otherwise we'll be stopped out for breakeven with some profit made and I am completely satisfied with that all right guys so as you can see trading these simple price action patterns can be a profitable strategy if you implement them in the right way if you create your own set of rules like we did here today and you test these simple patterns using the rules that you've created to see if it's profitable over time then you have an opportunity to create something that could turn you into a consistently profitable trader and I know I talked a lot about back testing and guys let me tell you why back testing is not the most fun it takes a very long time it's hard for a lot of people to do some people enjoy it those people are weird no offense to you if you're one of them but back testing is not very enjoyable to me I just know that if I don't back test my emotions will control my traits and I would find it hard to believe that any of you would be any different if you have real money on the line if you're risking a real $100 bill or in some cases if you have a larger account if you're really risking $1,000 on a trade and you have no idea what the statistical probability of being right is in that trade then you should be scared you should be worried about placing that trade because you are living in the realm of the unknown but once you back test the strategy and you see that out of a hundred trades if you would have taken every one of them in the same exact way using the set of rules that you have applied to your strategy that you would have been right 70 out of those 100 times or 60 out of those 100 times and you know that you own average had more than a one to one risk reward then it becomes effortless it becomes emotionless more importantly back testing is the only way to take the emotions out of trading in my opinion or at least that's been the case for my trading I found no other way to keep myself from getting emotional once I had real money on the line other than back testing a strategy for years for hundreds of trades to see that if I do consistently place this trade in the same exact way I will be profitable over the long run there is an incredible ease that comes over you once you have done that and you no longer look at the P&L in your account every five seconds while you're in a trade you no longer sit there and stare at the chart once you've placed a trade being discouraged over every tick that goes against you and overwhelmingly happy over every tick that goes for you now don't get me wrong there's nothing wrong with being happy about making money but doing the testing takes a lot of the emotion out of trading which is key to your success as a professional trader so take this information take these rules and change them keep them the same figure out how you want to play stops and targets for your simple pattern trading strategy test it in the markets keep me updated on what you come up with and make sure to comment below the video if you enjoyed this content as always subscribe if you're new and make sure to click that like button before you leave best of luck in the markets throughout the rest of the week and I'll talk to you guys soon you

Channel: The Trading Channel

Views: 300,199

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Id: A63gPm-48Ks

Length: 25min 12sec (1512 seconds)

Published: Tue May 03 2016