Thursday, August 16, 2012

The Mighty Appendix!

This is one of the three set-ups I use to trade the Eur/Usd  everyday. The First Post of this blog showed the beginnings of what would eventually become the "Appendix".

It's basically a combination of two patterns: Pipe Bottom and the Momo Reversal (of which you can find many examples here by using "Search This Blog" on the right. Then F3, type in "Momo Reversal", highlight text and then it will be easier to pick out amongst the posts).

  On the above 1 min chart of today's Eur/Usd action, the Momo Reversal is the three-legged move down- the last two are in the descending wedge. You can see pace turning bullish with each downside move. Then it breaks down, forming longer bars compared to the ones prior to the break and triggers stops as longs are caught by surprise and new shorts get on board.

Then price returns, and surpasses, the break down point just as quickly as it broke. Making a "flush" or "pipe bottom" formation. Now the people who are short are trapped and the final piece of the puzzle comes when a "sign of a reversal" appears where the original Momo Reversal should have held if it was going to be successful in the first place. It connects with prior price action as if the breakdown didn't even happen. Now the shorts liquidate and the old buyers get back in along with any new ones.

The above hourly chart shows where the original Momo was forming (thin yellow line) and where the Appendix exhausted itself into "significant support". The thick yellow line. This chart also shows the measured move 1-2 as compared to 3-4. It doesn't show the uptrend line that was providing support at 4, visible on a larger view of the hourly.

"But how do you know when to play the actual Momo or wait for a potential Appendix?" You may ask.

That's a (long) topic for future posts. :)


1Lot said...

Like the set up, very similar to one that I use. How is the week going?


James Edwards-Marche said...

I thought about keeping this kind of thing to myself-for the usual reasons- but came to the conclusion that the benefits of going through the thought process far outweigh any drawbacks...

All's well thanks :). Waiting for funds to arrive at IB so still SIM for now...

1Lot said...

Yeah definitely worth while.

Took a peek at EURUSD and doesn't look like your missing to much.

Bund has been easy money last couple of days but I haven't capitalised as well as I should have. Won't beat myself up too much but need to start getting my ducks in a row. This treading water thing this year is starting to get old.