Events
Blog
Would you like to find the trade that captures a critical turning point in the market? You’re probably like most traders: You would like to make a trade that catches the market just as it starts to turn around and never returns to the turning point.
If you study these critical turning points in the market, you will notice one thing: All these turning points have a similar look. The price action at these turning points is, generally speaking, extending beyond where the market has been trading prior to the turning point. These turning points are typically exhaustion turning points, that is, places where the market has just gone too far.
There is a far simpler way of characterizing these turning points in the market. These turning points come in two flavors: all-time highs, where the market trades at a very high price, before falling, and never returning to
that high, and all-time lows, places where the market falls much lower than most market participants had anticipated, and then rocket higher, never to return to the depths of that low. Traders around the world stare at these spots on the chart, wishing that they had entered a trade at these precise prices, to capture a windfall profit.
There is something that all these turning points have in common. These critical prices are usually stabbed by the market—an exploratory stab, a probe into no man’s land. Look to the left of these turning points, and you will find a common theme. Nearly all these all-time lows and all-time highs have one thing in common: There is no price action to the left.
Go ahead and take a look right now. Pull up your chart and see if you can find any price action to the left of the very critical all-time highs and all-time lows.Obviously, by definition you will not find a lower price than an all-time low,and neither will you find a higher price than an all-time high. What you will find is that the price patterns are all alone. To the left of these patterns is wide-open space. Have you noticed this on your charts?
You do not have to look to all-time highs and all-time lows; you can simply look to critical turning points places where the market does not return to for years. The spots will also have this characteristic: The market
does not return to those places on the chart where the market rarely trades.So, if we look to take our reversal set-ups at those spots on the chart where the market has not traded in some time, we are putting the odds in our favor.The easiest way to conceptualize this idea is to look to the left of your price pattern.
If you see wide-open space on the chart to the left of your catalysts, you may be looking at a critical turning point (see Figure 6.9), a great opportunity for you to participate in a long-lasting, profitable trade.
[You must be registered and logged in to see this image.]
FIGURE 6.9 The EUR/USD weekly chart prints a bearish big shadow. The formation has much “room to the left”—the market has not traded at this zone in over 74 weeks. After this big-shadow formation printed, the marked spent over 22 weeks away from this price.
The general rule is this: The more room to the left, the more likely this spot is a long-term high or long-term low.Sometimes the market will print a big shadow on a zone that has recently seen market activity.For example, in Figure 6.10 we see the GBP/JPY weekly chart prints a bearish big shadow.
[You must be registered and logged in to see this image.]
FIGURE 6.10 The GBP/JPY weekly chart prints a bearish big shadow with “room to the left.” The market has not printed on this zone for seven weeks, giving this big shadow some reasonable “room to the left.”
Because themarket has not printed on this zone for seven weeks, there is some space to the left of the bearish big shadow. Although it would be better if the market had not printed on this zone for 20 or 30 candlesticks, the fact that the market has not printed on this zone for seven candlesticks is perfectly reasonable, and thus this trade qualifies as having “room to the left.”
When choosing a big-shadow trade, or any other reversal trade, look to the left of the catalyst. If you see open space to the left, then perhaps the set-up will capture a critical turning point in the market.However, if you look to the left and you see recent price action at the same level, perhaps the market has not reached the exhaustion stage.Figure 6.11 illustrates a bearish big shadow on the GBP/USD four-hour chart with virtually no room to the left.
[You must be registered and logged in to see this image.]
FIGURE 6.11 A big shadow such as this one on the GBP/USD four-hour chart has printed on a zone with a lot of recent price action. Perhaps the market has not reached a turning point yet.
These set-ups are rarely ideal big-shadow trades. Most naked traders will only consider taking a reversal trade if the market has not printed on the zone for at least seven candlesticks. Reversal set ups with room to the left usually have a much higher success rate than those that print in an area on the chart with recent price action.
An easy way to visualize this “room to the left” rule is to draw a rectangle on your chart that captures the area of the chart that is unique to the two-candlestick big-shadow formation and extend this rectangle as far as possible to the left.
It is important to note that the big-shadow formation is a two-bar formation.This means that any unique space occupied by this catalyst may be occupied by both candlesticks. Contrast this to other catalysts such as the kangaroo tail and the big belt—these single candlestick formations may independently occupy unique space on the chart.
Remember, the further this rectangle extends before running into other candlesticks, the better. The very best big shadows will print at an area on the chart where the market has not recently traded.Take a look at the one-hour CAD/JPY chart in Figure 6.12.
[You must be registered and logged in to see this image.]
FIGURE 6.12 Waiting for big shadows with space to the left, such as this bullish big shadow on the CAD/JPY one-hour chart will aid you in picking high-probability reversal trades.
You can see the market has printed the big shadow on an area on the chart that has not seen recent price action in a very long time. The box to the left of the big shadow represents all of the “room to the left” for this trade set-up. The market moved 200 pips higher after triggering the buy stop on this bullish big shadow.
Profiting from Big Shadows
There are many methods for exiting the big-shadow trade, many of these methods are explored. A very simple method for exiting the big shadow is to simply place a take-profit target at the nearest zone. For bullish big shadows this would mean placing a profit target a few pips below the nearest resistance zone, and for bearish big shadows that would mean placing a profit target a few pips above the nearest support zone (see
Figure 6.13).
[You must be registered and logged in to see this image.]
FIGURE 6.13 The nearest zone makes for a very clear profit target. The bearish big shadow on the EUR/USD four-hour chart is an excellent sell signal. The market falls 171 pips down to the next zone at 1.3200.
The Rules
The big-shadow trade is easy to identify, and it often signals a critical turning point in the market. Here are the rules associated with the big shadow trade:
There are also several optimal characteristics that the best big shadows share; these features include:
Many traders do extremely well trading only the big-shadow trade. If you would like to become an expert with this trading system, spend time testing it so that you get comfortable trading big shadows.
If you study these critical turning points in the market, you will notice one thing: All these turning points have a similar look. The price action at these turning points is, generally speaking, extending beyond where the market has been trading prior to the turning point. These turning points are typically exhaustion turning points, that is, places where the market has just gone too far.
There is a far simpler way of characterizing these turning points in the market. These turning points come in two flavors: all-time highs, where the market trades at a very high price, before falling, and never returning to
that high, and all-time lows, places where the market falls much lower than most market participants had anticipated, and then rocket higher, never to return to the depths of that low. Traders around the world stare at these spots on the chart, wishing that they had entered a trade at these precise prices, to capture a windfall profit.
There is something that all these turning points have in common. These critical prices are usually stabbed by the market—an exploratory stab, a probe into no man’s land. Look to the left of these turning points, and you will find a common theme. Nearly all these all-time lows and all-time highs have one thing in common: There is no price action to the left.
Go ahead and take a look right now. Pull up your chart and see if you can find any price action to the left of the very critical all-time highs and all-time lows.Obviously, by definition you will not find a lower price than an all-time low,and neither will you find a higher price than an all-time high. What you will find is that the price patterns are all alone. To the left of these patterns is wide-open space. Have you noticed this on your charts?
You do not have to look to all-time highs and all-time lows; you can simply look to critical turning points places where the market does not return to for years. The spots will also have this characteristic: The market
does not return to those places on the chart where the market rarely trades.So, if we look to take our reversal set-ups at those spots on the chart where the market has not traded in some time, we are putting the odds in our favor.The easiest way to conceptualize this idea is to look to the left of your price pattern.
If you see wide-open space on the chart to the left of your catalysts, you may be looking at a critical turning point (see Figure 6.9), a great opportunity for you to participate in a long-lasting, profitable trade.
[You must be registered and logged in to see this image.]
FIGURE 6.9 The EUR/USD weekly chart prints a bearish big shadow. The formation has much “room to the left”—the market has not traded at this zone in over 74 weeks. After this big-shadow formation printed, the marked spent over 22 weeks away from this price.
The general rule is this: The more room to the left, the more likely this spot is a long-term high or long-term low.Sometimes the market will print a big shadow on a zone that has recently seen market activity.For example, in Figure 6.10 we see the GBP/JPY weekly chart prints a bearish big shadow.
[You must be registered and logged in to see this image.]
FIGURE 6.10 The GBP/JPY weekly chart prints a bearish big shadow with “room to the left.” The market has not printed on this zone for seven weeks, giving this big shadow some reasonable “room to the left.”
Because themarket has not printed on this zone for seven weeks, there is some space to the left of the bearish big shadow. Although it would be better if the market had not printed on this zone for 20 or 30 candlesticks, the fact that the market has not printed on this zone for seven candlesticks is perfectly reasonable, and thus this trade qualifies as having “room to the left.”
When choosing a big-shadow trade, or any other reversal trade, look to the left of the catalyst. If you see open space to the left, then perhaps the set-up will capture a critical turning point in the market.However, if you look to the left and you see recent price action at the same level, perhaps the market has not reached the exhaustion stage.Figure 6.11 illustrates a bearish big shadow on the GBP/USD four-hour chart with virtually no room to the left.
[You must be registered and logged in to see this image.]
FIGURE 6.11 A big shadow such as this one on the GBP/USD four-hour chart has printed on a zone with a lot of recent price action. Perhaps the market has not reached a turning point yet.
These set-ups are rarely ideal big-shadow trades. Most naked traders will only consider taking a reversal trade if the market has not printed on the zone for at least seven candlesticks. Reversal set ups with room to the left usually have a much higher success rate than those that print in an area on the chart with recent price action.
An easy way to visualize this “room to the left” rule is to draw a rectangle on your chart that captures the area of the chart that is unique to the two-candlestick big-shadow formation and extend this rectangle as far as possible to the left.
T W O - C A N D L E S T I C K F O R M A T I O N
A price pattern made up of two candlesticks. The definition and validity of the
price pattern is dependent upon characteristics of both candlesticks.
A price pattern made up of two candlesticks. The definition and validity of the
price pattern is dependent upon characteristics of both candlesticks.
It is important to note that the big-shadow formation is a two-bar formation.This means that any unique space occupied by this catalyst may be occupied by both candlesticks. Contrast this to other catalysts such as the kangaroo tail and the big belt—these single candlestick formations may independently occupy unique space on the chart.
Remember, the further this rectangle extends before running into other candlesticks, the better. The very best big shadows will print at an area on the chart where the market has not recently traded.Take a look at the one-hour CAD/JPY chart in Figure 6.12.
[You must be registered and logged in to see this image.]
FIGURE 6.12 Waiting for big shadows with space to the left, such as this bullish big shadow on the CAD/JPY one-hour chart will aid you in picking high-probability reversal trades.
You can see the market has printed the big shadow on an area on the chart that has not seen recent price action in a very long time. The box to the left of the big shadow represents all of the “room to the left” for this trade set-up. The market moved 200 pips higher after triggering the buy stop on this bullish big shadow.
Profiting from Big Shadows
There are many methods for exiting the big-shadow trade, many of these methods are explored. A very simple method for exiting the big shadow is to simply place a take-profit target at the nearest zone. For bullish big shadows this would mean placing a profit target a few pips below the nearest resistance zone, and for bearish big shadows that would mean placing a profit target a few pips above the nearest support zone (see
Figure 6.13).
[You must be registered and logged in to see this image.]
FIGURE 6.13 The nearest zone makes for a very clear profit target. The bearish big shadow on the EUR/USD four-hour chart is an excellent sell signal. The market falls 171 pips down to the next zone at 1.3200.
The Rules
The big-shadow trade is easy to identify, and it often signals a critical turning point in the market. Here are the rules associated with the big shadow trade:
- Big shadows are two-candlestick formations.
- The second candlestick of the formation is the big-shadow candlestick.
- The big-shadow candlestick has a higher high and a lower low than the previous candlestick.
- Big shadows must print on the zones.
- Big shadows print at extreme highs or extreme lows.
- Bearish big-shadow candlesticks have a closing price near the low.
- Bullish big-shadow candlesticks have a closing price near the high.
- Big-shadow candlesticks have wider ranges than the nearby candlesticks.
- For bullish big shadows, the stop loss is placed a few pips below the low of the big-shadow candlestick.
- For bearish big shadows, the stop loss is placed a few pips above the high of the big-shadow candlestick.
- The very best big-shadow candlesticks have room to the left.
There are also several optimal characteristics that the best big shadows share; these features include:
- The two-candlestick formation prints at an extreme high or low on the chart where the market has not traded in at least seven candlesticks.
- The big-shadow candlestick has a greater range than the previous 10 candlesticks.
- For bullish big shadows, the candlestick following the bullish big shadow triggers the buy stop order placed above the high of the big-shadow candlestick.
- For bearish big shadows, the candlestick following the bearish big shadow triggers the sell stop order placed below the low of the bigshadow candlestick.
- For bullish big shadows, the closing price for the big-shadow candlestick is within a few pips of the high.
- For bearish big shadows, the closing price for the big-shadow candlestick is within a fewpips of the low.
Many traders do extremely well trading only the big-shadow trade. If you would like to become an expert with this trading system, spend time testing it so that you get comfortable trading big shadows.
