We study the features of the formation and construction of trading strategies according to the popular model
The convergence zones identified using the “Shark” pattern can accurately identify the rebound, but do not necessarily lead to the restoration of a previously existing trend. On the contrary, often kickbacks serve to determine the ability of the forces that dominate the market in the previous period (“bulls” or “bears”) to return the initiative into their own hands. If they are not enough, then the final reversal of the previous trend occurs. True, within the framework of a different pattern. 5-0.
For the correct identification of the 5-0 model, first, you need to find the “Shark” pattern on the chart, wait for its targets to be realized at 88.6% or 113% and then roll back in the direction of 50% of the BC wave. The length of this wave in both graphic configurations is 161.8-224% of AB. If after reaching the convergence zones according to the “Shark” pattern, correction followed in the direction of 23.6%, 38.2% or 50%, we can talk about transforming the original model into 5-0.
In the case of the four-hour USD / JPY chart, after reaching the target by 113% according to the Shark pattern, a rollback followed in the direction of 38.2% of the CD wave. A trader should look for confirming signals in this area to form a long position. This can be indications of indicators, and tips from price action or other tools and techniques of technical analysis. In the above example, at the important levels, a combination of correction patterns 1-2-3 and Anti-Turtles arose.
Using the approach of Victor Sperandeo 2B Base / Top, the entrance to the long is carried out at the maximum level of the bar of the previous extremum. A simpler methodology for working on the 1-2-3 pattern involves opening a long position at the breakthrough of the correctional maximum at point 2. Profit is fixed after reaching the target on another “bullish” pattern 5-0. If at the same time the trader uses a floating stop order, then the effectiveness of his trade increases.
Thus, you need to understand that the rollback itself as part of the transformation of the Shark pattern to 5-0 does not mean anything. It can reach the level of 50% in accordance with the classical approach, it may not reach or, on the contrary, exceed it. Most importantly, another convergence model should emerge in the area of convergence. It is commonly called a subsidiary. Of course, if a trader is used to using other technical analysis tools, no one forbids him to do this.
Along with the 1-2-3 pattern, the Three Indians model works well on the correction . In the case of the four-hour NZD / JPY chart, its formation with the subsequent drop in quotes below the low of the second Indian bar allowed the trader to form a short position. The way out of it is carried out at the target level by 113% according to the Shark pattern. As in the previous example with USD / JPY, the use of a floating stop order allows you to increase the effectiveness of the strategy used.
It should be noted that the rollback within the framework of the Shark’s transformation in 5-0 reached the level of 61.8%. As a rule, if the quotes of a currency pair go above 78.6% and 88.6% of the BC wave, the risks of restoring a previously existing trend increase. And, on the contrary, the inability of the “bulls” (in the example with NZD / JPY ) to advance them above 23.6% indicates their weakness. Thus, the less deep the correction, the greater the chances of a reversal of a previously existing trend.
Pattern 5-0 has much in common with other price action models, including the Expanding Wedge or Wolfe Waves. We will talk about this in subsequent materials.