Is Ross Hook the Most Powerful Price Action Pattern?

As you know, technical analysts rely on the past of the price to predict its future. Some traders try to prove this way of trading to be wrong and unprofitable. But we want to show you the Ross Hook, the pattern, that is proven to be profitable for 32 years already.

Introduction?

The Ross Hook (RH) trading strategy is a 100% price action strategy based on the retest of 1-2-3 pattern breakout. If you haven’t read about the 1-2-3 reversal pattern, be sure to check it out first!

Also, I must warn you, if you are new in trading, trying to find a ross hook pattern on your chart may be quite difficult at first. Why? Because you need to identify 1-2-3 pattern correctly, and after that wait for Hook to emerge. That can be confusing at first but I’m sure you can deal with it!

How to find a Hook?

I don’t want you to get confused here because RH pattern is really useful, so I’ll explain everything as simply as I can. Look at the ordinary 1-2-3 pattern, and then at the Ross Hook.

Now, look closely at the RH.

Do you see it? The Ross Hook is just a smaller 1-2-3 pattern that is formed after the bigger one!

Now, everything you need to do is to find this “double 1-2-3 pattern” (that’s not an official name, but simplicity is the key).

Ross Hook Trading Strategy

To trade the RH pattern, we need to follow several steps:

▫Find a 1-2-3 pattern.
▫Wait for violation candlestick to emerge (it is considered to happen at the breakout of point 2 of the 1-2-3 pattern).
▫Open a trade after the point 2 retest.

Look at the picture to get it right. We have waited for the 1-2-3 pattern to emerge, then we opened a trade after the retest and put stop loss (SL) below the retest level.

Now, let’s analyze a short trade:
We have identified a pattern, waited for Ross Hook to form, and entered after the retest.

You can measure your take profit differently:

▫Measure the distance between point 1 and RH and use that as your take profit.
▫Multiply the distance from the entry point to stop loss by 2 or 3 and put your take profit here. You can put several take profits and move your stop loss after the price will hit the first target. This way you will get less unprofitable trades.
▫Do not set take profit. Instead of it move your stop losses behind each peak or low point that forms as your trade moves. In a good trending market, this will allow you to ride the trend most of the way and capture way more profit.Why Ross Hook?

First of all, I want to prove the usability of the pattern. Analysts from Oxford University have tested this strategy on 42 different assets (including forex pairs, futures, and stocks) over 32 year period. Starting with $1 million and having a risk of 1% per trade the strategy has proven to be profitable. If you have traded with this strategy, you would have made more than $5 million net profit.

Let’s sum up:

Pros:

▫Price-action based. You don’t need anything except a chart.
▫Tested on vast periods and have proven to be profitable for decades.
▫Good risk-to-reward ratio (up to 1:3 or even more, which is amazing).
▫You can trade on a 1-2-3 pattern while waiting for the RH to emerge.

Cons:

▫Entry points aren’t so often as on some other strategies.
▫You need to identify 1-2-3 and RH patterns and filter false price movements.
▫Nothing is ever perfect in trading, there will be false breakouts of RH and your stop loss can get hit.

Author / Analyst : Eduard Melkostupov
Source : FBS
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Relative Strength Index: Bulls vs Bears

What does the RSI tell?

The relative strength index (RSI) is an indicator used in technical analysis to measure the momentum of recent price changes. It helps traders to see whether a stock, a currency pair, or other asset is overbought or oversold. The RSI is presented as an oscillator (a line chart that moves between two extremes) and can have a reading from 0 to 100.

The standard is to use 14 periods to calculate the initial RSI value. The RSI will rise as the number and size of positive closes increase, and it will fall as the number and size of negative closes increase.

Interpretation of the RSI ranges

Generally, when the RSI crosses the horizontal 30 reference level from below, it is a bullish sign, and when it slides below the horizontal 70 reference level, it is a bearish sign. Put another way, one can interpret that RSI values of 70 or above indicate an asset is overbought or overvalued and may be primed for a trend reversal or corrective price pullback. An RSI of 30 or below indicates an oversold or undervalued condition.

During trends, the RSI may fall into a band or range. During an uptrend, the RSI tends to stay above 30 and should frequently hit 70. During a downtrend, it is rare to see the RSI exceed 70, and the indicator frequently hits 30 or below. These guidelines can help determine trend strength and spot potential reversals. For example, if the RSI can’t reach 70 on several consecutive price swings during an uptrend, but then drops below 30, the trend has weakened and could be reversing down.

On the contrary, if the downtrend is unable to reach 30 or below and then rallies above 70 it means that the downtrend has weakened and could be reversing to the upside. Trend lines and moving averages can also help with the analysis.

Best trading techniques with the RSI

The RSI is a multifunctional indicator. It presents not the only price over/undervaluation but can provide traders with many signals, such as divergence and patterns.

Let’s dive into an example and figure out what is the best way to use this oscillator.

Divergence

A bullish RSI divergence occurs when the indicator forms higher lows, but, at the same time, the price shows lower minimums. This indicates rising bullish momentum. A break above oversold territory can be used to trigger a long new position.

A bearish RSI divergence occurs when the indicator forms lower highs, but, at the same time, the price shows higher maximums.

The moment when the first green bar appears and the divergence is confirmed, a trader may open a trade with a Stop Loss under a recent low.

Swing Rejections

Another trading technique examines the RSI’s behavior when it is reemerging from overbought or oversold territory. The typical swing rejection consists of 4 parts.

▫The RSI gets lower (in this case) than 30. ▫The RSI returns above 30. ▫The RSI forms another dip without getting below 30. ▫The RSI breaks through the most recent high.

The moment of breakout is the trader’s entry point. Stop-loss sets under the recent low.

Accumulation

When a price is staying in the range and RSI moves inside a channel, it means that investors (traders) accumulate powers for the next move. Usually, during these moments, the RSI gets into the 40-60 range and after that, a channel gets broken and massive movements begin.

Patterns

Another great thing about RSI is that patterns work as usual. On the chart above traders couldn’t notice the trend reversal according to the price action, but the “Head with Shoulders” pattern appeared on the RSI. As soon as the RSI line crossed the shoulder line the price went down.

Conclusion

The RSI compares bullish and bearish price momentum and shows a result on the oscillator below a price chart.The RSI could be used to predict the end of correction during a trend.It could be used on the biggest time frames for defying trend reversal.During a flat market, it might be used as a signal of bulls/bears power accumulation.RSI patterns work as usual ones.

Author / Analyst : Kirill Belyaev
Source : FBS
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How to Trade Trend Pullbacks?

What is pullback?

The price never follows straight lines. Usually, price movements can be described as so-called price waves. During the strong trend, every next high must be higher than the previous one and every next low should be higher than the previous one as well.

In the picture above a perfect example of the bullish trend is presented. As you can see there are three correction waves, which allow traders to enter the strong bullish market.

In this article, we will discuss how to pick the best point to enter the market during the correction.

John Heels trend line theory

Trend lines are the best trading instrument of all time. Even traders who swear off indicators draw them.

Generally speaking, a weak pullback points to trend strength. Vice versa, bigger pullback signals upcoming trend reversal.

John Hill, a famous trading writer, created the trend theory. This theory is simple, a trader needs to draw only two trend signal lines to define the trend power.

First, you need to learn how to draw signal lines.

▫Put 0 to an extremum point
▫Put 1, 2, 3, 4 according to the picture below

Connect 0 and 4, 0 and 2.

If during bullish trend the 0-4 line is steeper, the pullback has power. Avoid trading this pullback.

If during a bullish trend the 0-2 line is steeper, the pullback has no power. You might open a long trade as presented in the picture (when price breaks through the 0-4 line).

You might use this example during downtrends as well.

Breakout pullback

Breakout pullback is one of the most popular pullback strategies. This strategy is the most effective at the market turning points. During the strong trend, a price might consolidate in the channel and form support and resistance levels.

In the picture, you can see that the price broke through the first support level (upper blue line) and retested it from the below (after a breakout, the price usually returns to the level which has been broken through). In the moment of retest, an aggressive trader might open a short trade. In this case, the potential reward/risk ratio is highest because the price may get above the level and continue the uptrend.

The conservative trader should wait until the price continues the trend structure and breaks into a new low (lower blue line breakthrough). That is the second sell entry point. The conservative entry happens later and, therefore, the potential reward/risk ratio is also smaller.

Horizontal steps

During trend movement, the price always pulls back to accumulate powers for the next moves. Usually, the price returns to the previous high/low level and tests it from above/below during a bullish/bearish trend respectively. This pullback might be considered as an opportunity to find an alternative entry point for those who missed the initial entry opportunity.

Furthermore, a trader could also choose to use the stepping pattern to pull the stop loss behind the trend in a safer way. In this case, the trader waits until the price has completed a step in the direction of a trend and then pulls the stop loss behind the last pullback area. The trailing stop loss is then safely protected and not as vulnerable.

Trendline pullback

This is another famous method of trading pullbacks. The drawback is that trendlines often take longer to be validated. You can always connect two points, but trendline requires at least three touches. That’s why you can trade trend line pullback only at the 4th or 5th touch.

It is a good additional method, but as a standalone method, the trader may miss many opportunities.

Conclusion

In this article, we have discussed 4 strategies to trade pullbacks during an ongoing trend.

▫Signal lines strategy
▫Breakout pullback
▫Horizontal steps
▫Trendline pullback

The first three strategies can be used separately, while the trendline is an additional option that can improve any of the presented strategies.

Author / Analyst : Kirill Belyaev
Source : FBS
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Ultra-fast Scalping Strategy

We often get a lot of requests from FBS traders on how to do scalping professionally. This is indeed a difficult trading style that requires a good reaction and skills. That is why we have thorough coverage of this topic on our website. You can already find a strategy with Bollinger Bands and a 5-minute scalping strategy with two moving averages in the “Tips for Traders” section. They have something interesting in common: they both are implemented on the M5 timeframe. On this timeframe, a trader can execute multiple trades within one hour. Of course, trading at such a small timeframe requires your total attention and patience.

What if we say that you can trade even faster on the M1 timeframe? Yes, it’s possible! However, you need to follow certain steps to avoid the danger of misleading signals.

First of all, have a straightforward strategy with entry and exit rules.

Secondly, know how much risk you can take. Be sure that your take profit is at least twice bigger than your spread.

Thirdly, choose the most liquid pairs with tight spreads (EUR/USD, GBP/USD, USD/CHF, USD/JPY).

Important tip: it’s highly recommended to choose ECN accounts for scalping. They provide fast execution of orders.

If you are good with the rules we declared above, let’s look at the strategy!

Trading strategy “MACD + Bollinger Bands”

Trading setups: Bollinger Bands with 100 periods, Bollinger Bands with 20 periods, MACD (12; 9; 26).

Trading instruments: EUR/USD, GBP/USD.

Buy entry rules:
▫The fast Bollinger Bands (20) should move below the slow Bollinger Bands (100).
▫MACD needs to cross its signal line bottom-up in the oversold zone (below zero).
▫Open the “Buy Stop” order when these conditions are implemented.
▫Place the Stop Loss on the lower Bollinger Band (20).
▫If you follow a less-risky approach, locate your Take Profit on the upper border of the Bollinger Band (20).
▫For risk-takers, you need to close your position when MACD crosses signal line above zero.

Let’s look at the example.

On June 30, we traded GBP/USD. The fast Bollinger Band was moving below the slow one. Approximately at 11:16, we entered a trade at 1.1892 after the signal line of MACD crossed the indicator in the oversold zone. Stop Loss was located at 1.1884 (lower Bollinger Band (20)), while Take Profit was placed near the upper Bollinger Band (20) at 1.1898.

Sell entry rules:
▫The fast Bollinger Bands (20) should move above the slow Bollinger Bands (100).
▫MACD needs to cross its signal line upside down in the overbought zone (above zero).
▫Open the “Sell Stop” order when these conditions are implemented.
▫Place the Stop Loss on the upper Bollinger Band (20).
▫A rule for a conservative trader: locate your Take Profit on the lower border of the Bollinger Band (20).
▫A rule for risk-taker: close your position when MACD crosses signal line below zero.

On the same chart, a situation on June 30 allowed us to sell the pair. After the signal line of MACD crossed the indicator in the overbought zone and fast BB (20) started moving above the slow (100) one, we opened a position at 1.1906. We located Stop Loss at 1.1907 and Take Profit at 1.1898.

Bottom line

Scalping on the M1 timeframe is not a popular technique given the risks involved. You need to be a cold-blooded, quick decision-maker who thinks ahead and understands the action he does. We recommend you master the trading strategy above on a demo account first. This way, you will definitely become a pro in scalping.

Author / Analyst : Ekaterina Gorbatenko
Source : FBS
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1-2-3 Reversal Pattern Strategy

123 reversal setup is a basic on-chart formation, that warns about upcoming trend reversal.

Setup

The 123-chart pattern is a three-wave formation, where every move reaches a pivot point. This is where the name of the pattern comes from, the 1-2-3 pivot points.

Here is how the pattern looks like:

123 pattern works in both directions. In the first case, a bullish trend turns into a bearish one. And the second picture presents the opposite, a bearish trend turns into a bullish one.

The structure of 123 chart pattern

The pattern appears after three price movements, which form three pivot points and a confirmation level.

Pivot point 1.

This is a turning point that the price formed during the trend. If a price breaks the previous trendline after it formed pivot point 1, the pattern will be more reliable.

Pivot point 2.

The next turning point is very likely to form outside of the previous trendline or channel. This is a good indication that the trend might be ready to end and reverse.

Pivot point 3.

Pivot point 3 is crucial for 123 reversal chart patterns. The point must not exceed the pivot point 1 (in the worst case it might be on the same level) for the pattern to be valid.

Confirmation level

The confirmation level is our entry point in the market. It is located at the same level as pivot point 2. When price breaks through this level open the trade.

Target level

To set the target trader needs to connect 1 and 3 pivot points with a line. The size of your 123 pattern equals the vertical distance between Line 2 (which is a horizontal line at the level of 2 pivot point) and the midpoint of Line 1.

123 chart pattern stop loss setup

It is highly important to use stop loss when trading the 123 chart pattern. The stop loss should be set under pivot point 3 in the bullish trend reversal, and above in the bearish one. In the condition of high market volatility, the price might get pushed beyond the 2 pivot point for a while. That’s why it will be a good idea to set stop-loss slightly beyond the 3 pivot point, as this will prevent stop loss from being activated.

Continuation 123 pattern setup

123 pattern also might work as a continuation pattern. In other words, it could give a signal that the trend is not going to reverse.

In this case, the price does not break the “confirmation level” at pivot point 2. On the contrary, it returns to the pivot point 3 level and breaks it through. This setup gives a signal that the trend will continue.

Stop-loss in continuation pattern formation

If you are trading the 123 pattern as a continuation formation, then your stop-loss order should go beyond Pivot Point 2.

The target level of 123 continuation pattern

The target of the “continuation 123 pattern” measures the same way as usual. The only exception is that in this case, you should take pivot point 3 as a starting one of your target.

Example

If you would only know about 1-2-3 patter in May 2021. That would be the greatest short trade ever! Let’s look at the perfect example of this pattern!

Daily Bitcoin chart

After the Bitcoin chart has formed 1 pivot point the price dropped behind the trend line, where the 2 pivot point occurred. Then the price bounced back and the 3 pivot point and a potential stop loss level appeared. After the price broke the confirmation level it dropped and reached the pattern target.

Conclusion

123 pattern is a common pattern that usually appears at the beginning of many price reversals. Sometimes, it might give a signal about trend continuation as well. To get higher quality signals it is better to use the 123 pattern in a tandem with an oscillator (for example RSI). At the moments of RSI extremes, 123 pattern will provide the most accurate signals.

Author / Analyst : Kirill Belyaev
Source : FBS
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