Showing posts with label Reversal Pattern. Show all posts
Showing posts with label Reversal Pattern. Show all posts

Saturday, February 1, 2025

M & W Wave Patterns │ Arthur A. Merrill

In 1971, Robert A. Levy made the first attempt to systematically classify price patterns. He categorized five-point patterns, defined by price swings influenced by stock volatility, and tested their significance. Although he was unable to identify any substantial forecasting power, he introduced a valuable concept: the five-point categorization of time-price patterns.

» Pick any five consecutive turning points. If the first of the four swings is upward, 
the pattern forms an M. If the first swing is downward, the pattern is a W. «
Arthur A. Merrill, 1984.
 
This method remained dormant for a decade until Arthur A. Merrill revived it and published applicable results in the early 1980s: He employed the same five-point pattern approach, but instead of Levy's volatility filter, he used a rather large 8-percent swing filter in his research study. (Of course, since time and price are fractal, Merrill's patterns are too; they appear on every price swing scale across all timeframes.)
 
Merrill's 16 M and 16 W wave patterns, and their statistical occurrences: Are some of these patterns bullish? 
Are some bearish? When a certain pattern occurred in the past, what happened to prices after the pattern?

Merrill organized five-point patterns based on the sequential order of points from high to low, creating a structured taxonomy of "Ms" and "Ws". He identified 32 distinct patterns, grouping them into two categories: 16 resembling a capital M and 16 resembling a capital W. He then highlighted six subcategories, based on classical chart pattern names used by market technicians:

Uptrends                                            M15, M16, W14, W16
Downtrends                                      M1, M3, W1, W2
Triangle                                               M13, W4
Head and Shoulders                      W6, W7, W9, W11, W13, W15
Inverted Head and Shoulders    M2, M4, M6, M8, M10, M11
Broadening                                        M5, W12
 

For example, an M1 is a strongly descending pattern, while the middle patterns, M8 and M9, are flat. An M16 is a strongly ascending pattern. Similarly, a W1 is a descending pattern, the middle Ws are flat, and a W16 is an ascending pattern.
 
So, what is the practical application and benefit of Merrill's weird-looking M & W Wave Patterns in trading? They can be used to identify support/resistance levels, determine areas of interest, anticipate market direction and reversals, project extensions, define entry and exit points, and manage risk. 
 

How? You may want to watch the following video, as well as review the references and recommendations provided below.
 
 
Reference:
 
See also: 

Sunday, September 8, 2024

Toby Crabel’s Bull Hook Trading Strategy Tested | Ali Casey

As an algo trader, I value patterns for their ease of programming and testing, which allows for the development of robust trading strategies. Today, we'll explore bull and bear hooks, patterns that can vary in details but generally serve to catch traders on the wrong side. Toby Crabel, Joe Ross, and Thomas Bulkowski, among others, have variations of these patterns.

Toby Crabel's original definition of the Bull Hook pattern:
» A Bull Hook occurs on Day 2. A Bull Hook is defined as a day with a higher open than the 
previous day's high followed by a lower close with a narrowing daily range. The next day (Day 1), 
a trade is taken on the initial move off the open, preferably to the upside. «
 
Toby Crabel's original definition of the Bear Hook pattern:
  » Bear Hook is a day in which the open is below the previous day's low and the close 
is above the previous day's close with a narrow range relative to the previous day. As implied by 
the name there is a tendency for the price action following a Bear Hook to move to the downside. «

The Bull Hook pattern has two main forms:

Bull Hook 1: In a downtrend, the pattern is identified when today's bar is an up bar with a smaller range than the previous day and is an inside day (high lower, low higher than the previous bar). We buy with a stop order above the high of this bar.
Bull Hook 2: Here, today's bar is a down bar with a smaller range than the previous day, opening above the previous high and closing below the previous close. This pattern involves just two bars.


For testing, I used TradeStation with S&P 500 e-mini futures data. The backtest for Bull Hook 1 was disappointing, showing a loss with only 15 trades, which seemed unusual given its pullback nature. A deeper analysis suggested that the specific conditions, particularly the inside day and green bar requirements, were limiting trades. By removing some conditions, like the inside day and green bar, and focusing on a simpler pullback strategy, the results improved significantly with about 200 trades and positive performance metrics. For Bull Hook 2, the test also yielded fewer trades than expected, which might be attributed to its breakout nature, not performing well on the S&P 500. Simplifying the conditions here also improved the results somewhat, though it remained less effective. The Bear Hook pattern, when flipped for long trades, performed better but still had a low trade count. Removing some conditions and simplifying it increased the trade count and improved performance. While both Bull Hook patterns had potential, their effectiveness was highly dependent on specific conditions and the number of trades generated. Simplifying the patterns often led to better results.

Thursday, July 4, 2024

Structural Characteristics of Bullish and Bearish Months | D'onte Goodridge

Traders want to find trending markets but often fail to see and understand the structural characteristics of bullish and bearish months. Both move in a similar fashion but inverse to one another. Here are the characteristics for the formation of a bullish month:
 
 
The first example is a daily chart of US Dollar versus Japanese Yen (USDJPY) during February 2023. The market was trending up. It was a bullish month. Let's identify the five key factors to a bullish month:

1. Price moves below the monthly opening price.
2. A swing low forms below the month's open.
3. Price purges a previous daily low (PDL) and reverses back to a previous daily high (PDH).
4. The market creates a market structure shift (MSS) to the upside and an Imbalance or Fair Value Gap (FVG).
5. Higher swing highs and higher swing lows form.
 

Looking at the daily candles in the USDJPY chart, we see the methodical sequence of a Bullish Month developing:
 
1. Price was movesg below the monthly opening price. Price stops below it, runs up, drops below it, runs up and continues the bullish trend.
2. A swing low below the month's open forms. This is a swing low because the candle on the left has a higher low and the candle on the right has a higher low, hence the low in the middle is the lowest point. To form a swing low  only takes three bars.
3. Price purges a previous low and works back to a previous high. The following day price reverses back to the previous daily high, all happening within a three bar setup, creating a swing low, which is a purge on the previous daily low and a reversal back to a previous daily high.
4. Next the market creates a shift to the upside with speed through a previous swing high and a FVG.
5. And price created a new swing high and a higher swing low.

The next example is a daily chart of Apple during January 2023. The same five criteria for a Bullish Month were met:
 

Now let's look at the five key factors to a Bearish Month:

1. Price moves above the monthly opening price.
2. A swing high forms above the month's open.
3. Price purges a previous daily high and reverses back to a previous daily low.
4. The market creates a shift to the downside and a FVG.
5. Lower swing highs and lower swing lows form.
 

The first example is a daily chart of British Pound versus US Dollar during August 2022. The market was trending down. Identify the above listed five criteria for the formation of a Bearish Month:
 
 
The last example is a daily chart of Gold during February 2023. Gold was in a down trend. Identify the structural criteria for the formation of a Bearish Month:
 
 

Tuesday, July 2, 2024

The Oops! Reversal Setup | Larry Williams

One of Larry Williams’ best-known setups is called Oops!: We are waiting for the market to open. We take as a reference the daily bar of yesterday, with its open, evolution and close. When the market opens, suppose a gap up occurs. A gap up takes place when the open is higher than the highest point that was reached on the previous day; a gap down occurs when the open is lower than the lowest traded point of the previous day.


When a market opens at a very high level and there is a gap up, it is very strong. So, we obviously suppose that it goes up. It will probably do it but, if for some reason it starts to fall and then reaches the highest level of yesterday, it is as if it said: "Oops!, I was wrong. I’m not strong, but weak." In this case, we open a short position at this level. We enter short because we imagine that the market (and the players in the market) realizes it isn’t that strong. Actually, the market is weak, so it will go down. 

To use this setup, we obviously need a stop-loss whose size depends on the market we are trading. How do we close this position? Larry Williams proposed a bailout exit he called "first profitable open". This consists in staying in the position until, on the following day or days, the market opens somewhere below the entry level (because we are short). When that happens, we close the trade. So, we keep the position until we get the profit or, obviously, when we are stopped out. We can also close the position at the end of the same day. The one suggested by Larry Williams is however the best one, although it sounds quite weird. Believe me, the first profitable open is a very effective close of the position.
 
This is the basic version of the Oops! Anyway, I know Larry Williams made some tweaks to it. The Oops! works, but today this specific setup is quite rare. The reason is that many markets trade for 23 hours a day now. So, it’s quite hard to have a heavy gap in just one hour. Maybe, you can have one after the weekend, but normally it’s not there.

Monday, July 1, 2024

Buy and Sell Signals | Larry Williams

If I observe prices in a strong downtrend, followed by a period of sideways movement before another decline, only to immediately return to the previous trading range, that's a buy signal.
 

Buy Signal: Dump, dump, (dump), go sideways and pump a bit, one more small dump, then the pump.
Sell Signal: Pump, pump, (pump), go sideways and drop a bit, one more small pump, then the dump.
 
Why? Because, during the sideways range, accumulation was taking place. The breakdown likely liquidated many long positions, and professional money will often buy in that area.
 
 
If the price quickly returns to the range, it confirms that they’ve been buying, and that's when I want to enter a long position in the market.
 
See also:

Wednesday, June 12, 2024

Swing Points as Trend Change Indication | Larry Williams

A trend change from up to down occurs when a short-term high is exceeded on the upside, a short-term trend change from down to up is identified by price going below the most recent short-term low. The first chart depicts such trend changes in a classic manner, study it well because reality comes next! Here are a couple of pointers on this technique. Although the penetration of one of these short-term highs, in a declining market, indicates a trend reversal to the upside, some penetrations are better than others.

» There are only two ways a short-term high or low is broken. «

There are only two ways a short-term high or low is broken. In an up trending market, the low that is violated or fallen below will be either a low prior to making a new rally high, as shown at (A) in the second figure, or a low that occurs after decline of a high that then rallies making a lower short-term high; it then declines below the low prior to the rally that failed to make a new high, as shown at (B). The better indication of a real trend change is the violation of the low shown at (A). 
 
Best Trading Patterns.
 
By the same token, a trend reversal to the upside will occur in one of the two following patterns: In (A), the rally peak prior to a new low is violated to the upside, or in (B), the market makes a higher low, then rallies above the short-term high between those two lows. In this case, again, the (A) pattern is the better indication of a real trend reversal.

 
See also:
 
Arthur A. Merrill (1980) - M and W Wave Patterns
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Wednesday, May 29, 2024

My New Reversal Day Discovery | Larry Williams

The most common reversal day is simply one where prices sell off substantially, almost always down limit, only to reverse and close up for the day. Such a day appears in the following diagram [A + B].
 
» When prices should go lower, but don't, buy ! «

A series of top and bottom reversals are also shown for your observation. Notice, in each case, how a temporary reaction against the main trend was ended when we had the flush-out day with prices selling off drastically, then recovering, to close up for the day. A reversal day is even more significant the longer the correction has been in effect.
 
Our second form of reversal day, and one I’ll bet you’ve never even heard about, starts with prices heading sharply lower and closing, sharply lower prices might end up limit down, or just off sharply but, in any event, prices take a beating and are down handsomely for the day [C].

The trend reversal is indicated the next morning when prices open a good deal higher than the previous day's close. Such unusual strength is indicative of a key reversal for the market. What happens, in essence, is that prices fail to follow through with the previous day's slide. This type of action is most unusual since lower prices forecast lower openings about 85% of the time. Lower prices, with substantially higher openings, are a sure thing that a new move has begun.

It is particularly significant if prices close down the limit, and the next day open slightly up. Limit moves should beget more limit moves. A reversal of this pattern points to a market opportunity. A special point of interest here is that an extremely strong signal is generated any time you have two reversal days with the second one higher, for a buy, lower for a sale. This is an unusual display of strength. I cannot recall when such a signal did not produce profits.

Wednesday, April 3, 2024

ICT NY Midnight Open and the Previous Day's High and Low | Darya Filipenka

This is how I incorporate the New York Midnight Open (NMO) level when I prepare my premarket plan. This also helps me to predict possible trend day. Previous highs and lows are important in trading as they can indicate potential market reversals or continuation of a trend. When the market has a predisposed bias or trend, you want to focus on the previous day's high or low. If the market reaches the previous day's high and you're bullish, you want to see if it creates an optimal trade entry. Many times, this formation forms throughout the week in various currencies and assets. There are instances where the market raids the previous day's highs for buy stops and previous day's lows for sell stops. Not every previous day's high or low is the same in terms of opportunity, but there's a criteria to look for when seeking liquidity resting above or below these levels. Understanding the conditions that lead to a raid on buy stops above the previous day's high or sell stops below the previous day's low can help you identify potential market reversals.
 
PDH = Previous Day's High
PDL = Previous Day's Low 
PDA = Premium and Discount Arrays as a guide to determine where to buy and sell
 
Quoted from: