No Reason 2

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BarroMetrics Views: No Reason 2

  • ‘Once the reason for a trade is gone, exit’.
  • What’s the best trade? ‘Being wrong and not losing money.’

These are among my two favourite sayings by Pete Steidlmayer. In today’s blog, we’ll see both principles in action.

Figure 1 shows the USDCAD setup:

  • The Rule of 4: on the 4th attempt at an extreme, the odds favour a successful breakout. If the breakout fails, expect the start of the move to be breached. In this case, the extreme is 1.33650 and the start, 1.3005.
  • The reason for the trade: because of the Rule of 4, I was expecting a valid breakout. For this to be true, we should not see acceptance below the FTP (yellow rectangle) low (1.3318).

The early morning manipulation first saw a breakout. So, now it was time to enter.

I enter on a retest of the FTP zone. I decided to reduce my position size to 50% (because of the pattern I mentioned in ‘No Reason‘). I had my stop below the start of the latest 1-d swing directional move (1.3226).

After entry, the USDCAD broke below and accepted below the FTP low at 1.3325 – the price action negated the assumption behind the valid breakout. For this reason, when the pair rallied, I exited the position at breakeven.

So, what now?

The trade is still on with a slightly lower FTP low (1.3368). My process:

  1. I wait for a valid breakout;
  2. Then I look for a retest of the FTP within
  3. (Usually) 6-16 bars (of the execution timeframe) of the breakout.

Let’s see what happens.

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FIGURE 1 USDCAD 290-min

 

 

FTP: A Breakout Filter

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BarroMetrics Views: FTP: A Breakout Filter

Breakout systems have a win rate of around 30% to 35%: one of the reasons I prefer to be a responsive trader (sell corrective highs, buy corrective lows).

But, Bob Volman in his book, Understanding Price Action suggests a filter which raises the breakout win rate considerably. He calls his price action pattern, ‘False, Teaser, Proper’ (I call it FTP).

What’s an FTP?

A: Congestion price action occurring at different price levels in a congestion market. The ‘False’ (F) occurs at the other end of the boundary of congestion to a breakout, the ‘Teaser’ (T) around mid-range, and the ‘Proper’ (P) around the Primary Zone or just beyond it.

Proper patterns show a struggle between the buyer and the seller which, if resolved in favour of the dominant trend, create directional pressures that increase the odds of success. In addition, the opposite extreme of the congestion to the breakout direction provides a key reference point to anchor an initial stop.

I’ve added a couple of wrinkles. For example, Bob focuses on 5-minute patterns. I’ve found that FTPs are effective in any timeframe. They can be observed in the Second Lower Timeframe.

For example:

Brexit was accompanied by a downside breakout of the GBPUSD from a sideways pattern that began in 1985.

Figure 1 shows the 13-week swing and a lower timeframe FTP forming between 1.3480 and 1.2964. Within the larger FTP, we see a smaller on.

Figure 2 shows, nesting within the larger FTP, a smaller one. So, now we have 3 FTPs:

  • One clearly visible in the weekly
  • One, in the weekly, needing clarification. The Daily confirms this FTP.
  • One, in the daily, needing clarification which the 290-min provides.
  • The 290-min draws our attention to a 15-min FTP.

Why is this important? Because it allows us to lower our risk. The weekly FTP proves a risk of 534 pips; the 15-min FTP allows for a risk of 50 pips.

What the FTP has done, in this case, is not only increase the probability of success but also the return on ROI.

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FIGURE 1 Weekly GBPUSD

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FIGURE 2 Daily GBPUSD

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FIGURE 3 290-min GBPUSD

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FIGURE 4 15-min GBPUSD