Getting That Reversion

Last week we presented the Surround Input configuration, today we will examine an operation that encompasses both the Pin Bar and the Surround Configuration that produced an accurate input on a trend reversal.

Trading with a trend reversal may be the most profitable source of trading, but is often the most difficult area to enter for two reasons: first, the previous trend may simply continue; second, you may be right and there is an imminent reversal, but if the entry is given out of time it will be left out. That said, this trading example shows that with the right criteria, you can safely enter a reversal.

So let’s get close to her. Here is the daily chart of the AUD/USD:

Before the pin bar was marked on the chart, the price had been on a marked downward trend. The Pin Bar marked the first sign that the trend may be ending. However, by itself, at least for me, that did not produce sufficient confirmation of a trend reversal as the pin bar did not line up with a previous support or Fib level. The trend may have been simply pulling back a little before continuing downward.

Then, however, the next two candles produced a bullish Surround Configuration. In summary, an Envelope Configuration means that the body of a candle is wrapped in the opposite direction of the candle next to it and the two candles have short wicks in relation to their bodies (precisely, the body must be at least two-thirds of the total length of the candle).

Now at this point, with a bullish Pin Bar immediately followed by a bullish Surround Configuration, I was confident enough to enter the opening of the next sail to achieve at least 1:1 risk/reward in trading. Trading reached the target profit within the next two candles (+125 pips).

It is worth looking at the graph in relation to a trend line. In this previous DailyForex article, I wrote about entering the markets using trend lines. Using the same principles, let’s take a look at the same graph with the trend line drawn before the pin bar:

Note that once the trend line breaks, the Surround Up Configuration tests the downward trend from the other side, now as a support level. This gave further confirmation that the Surround Configuration provided a very timely input.

Some interesting points arise about my choice to leave at only 1:1 risk/reward. The next resistance was several hundred pips away and 1:2 or even 1:3 risk/reward was easy to achieve. The reason I left at 1:1 is that I find that daily charts are long term compared to my other trades; therefore staying in one market for a day or two is a relatively long time for me. Therefore, this was an emotional decision for me rather than a strategic one. At the very least, I should have taken some of my position off the 1:1 first profit target, moved the stop-loss to the break-even point and kept the rest of the trading up until the next resistance.

 

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